2000 Fiscal Year Final Research Report Summary

Mechanism Design of Bank Bailout Policy

Research Project

Project/Area Number	11630010
Research Category	Grant-in-Aid for Scientific Research (C)
Allocation Type	Single-year Grants
Section	一般
Research Field	経済理論
Research Institution	KYOTO UNIVERSITY
Principal Investigator	OSANO Hiroshi Kyoto University, Kyoto Institute of Economic Research, Professor, 経済研究所, 教授 (90152462)
Project Period (FY)	1999 – 2000
Keywords	Bank Bailout / Cash Injection / Financial Crisis / Deposit Insurance
Research Abstract	Under the incomplete contract framework, we consider an optimal regulatory policy for motivating bank equity owners and bank managers to restructure the bad loans of their banks in the presence of managerial compensation contracts with stock options. The regulatory policy studied in this paper is mainly concerned with the design of repayment schedules in the scheme of injection of cash funds into insolvent banks by the regulator. We show that the regulator cannot necessarily attain the social optimal allocation by injecting cash funds into insolvent banks through the purchase of subordinated bonds with the risk-free interest rate. However, even in that case, we also suggest that, if the regulator injects cash funds into active restructuring banks through the purchase of subordinated bonds or preferred stocks with less stringent repayment conditions and nationalizes passive restructuring banks, the regulator can attain the social optimal allocation by performing such a non-linear injection scheme under certain conditions.