Research Discussion Papers, Bank of Finland
No 14/1995:
The Banking Crisis, Banking Policy Regimes and the Value of a Bank
Risto Murto ()
Abstract: This paper studies the value of a bank under different
banking policy regimes. As banks run into financial distress, authorities
in different countries have used different approaches to deal with the
crisis. The Nordic countries provide examples of different policy
approaches. The results show that the uncertainty over the banking policy
regime and changes in this uncertainty can have a major impact on the value
dynamics of bank shares. The model produces moral hazard problems both
before and after public sector intervention. On the other hand, bank
support can increase the original shareholders' incentive to inject new
capital into the bank. The model also implies that the government may have
an incentive to cheat the bank's shareholders in order to ensure more
capital injections from them.
Keywords: banking crisis; banking policy regime; bank support; (follow links to similar papers)
30 pages, April 4, 1995
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