True Taxpayer Burden of Bank Restructuring

Landier, Augustin and Ueda, Kenichi (2009) True Taxpayer Burden of Bank Restructuring. TSE Working Paper, n. 10-238, Toulouse

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We formalize the taxpayer burden implied by various bank restructuring plans. Even assuming minimal frictions, in spirit of Modigliani and Miller (1958), when debt contracts cannot be changed, transfers from the taxpayer (in a Net Present Value sense) are necessary. Debt holders benefit from a lower default probability and a higher recovery given default. Absent government transfers, their gains imply a decrease in equity value. Shareholders will therefore oppose the restructuring unless they receive transfers from taxpayers. The taxpayer burden consists of the NPV of inflows and outflows of cash needed to persuade shareholders (or bank managers) to accept a change in capital structure. The government’s intervention aims at preventing systemic effects from a default of an important bank, and thus targets a default rate. Due to different implied recovery rates given default, the required transfer amounts vary across restructuring plans that achieve the same target default rate. In this regard, asset sales require more transfers than recapitalization or asset guarantees, because asset sales support a higher recovery rate.

Item Type: Monograph (Working Paper)
Language: English
Date: 5 June 2009
Place of Publication: Toulouse
Uncontrolled Keywords: Bank restructuring, Too big to fail, Bank subsidy, Crisis management
JEL codes: G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G28 - Government Policy and Regulation
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 18 Jan 2012 06:04
Last Modified: 20 Mar 2018 13:21

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