A note on selling distressed loans with bank bailouts: modelling of bank interest margins with default probabilities

摘要

This article extends the framework of Merton (19744. Merton, R. C. 1974. On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance , 29: 449-70. [CrossRef], [Web of Science ®]View all references) with Vassalou and Xing (20047. Vassalou, M. and Xing, Y. 2004. Default risk in equity returns. Journal of Finance , 59: 831-68. [CrossRef], [Web of Science ®]View all references) to value a troubled but solvent bank's equity by explicitly incorporating distressed assets purchased by the government in an imperfectly competitive loan market. We show that the bank may be willing to take this bailout when the purchased amount is relatively small and the margin is relatively low. However, the bank may be harder to entice even when the unit price of the bailed-out assets subsidized by the government is relatively high. As a consequence, most of the first half of the Troubled Asset Relief Program's money is not used to buy troubled assets (Wilson, 20108. Wilson, L. 2010. The put problem with buying toxic assets. Applied Financial Economics , 20: 31-5. [Taylor & Francis Online]View all references).View full textDownload full textKeywordsbank bailout, interest margin, default probability, distressed loanJEL ClassificationG28, G13Related var addthis_config = { ui_cobrand: "Taylor & Francis Online", services_compact: "citeulike,netvibes,twitter,technorati,delicious,linkedin,facebook,stumbleupon,digg,google,more", pubid: "ra-4dff56cd6bb1830b" }; Add to shortlist Link Permalink http://dx.doi.org/10.1080/13504851.2011.591724