FAILED BANK RESOLUTION AND THE COLLATERAL CRUNCH - THE ADVANTAGES OF ADOPTING TRANSFERABLE PUTS

Current methods of failed bank resolution are unnecessarily expensive for tax-payers and impose substantial costs on borrowers at failed ban ks. This situation is the result of distorted incentives imbedded in t he standard contract between the government and acquirers of failed ba nks, which result in more loan foreclosures than if the loan were held by a well-capitalized bank. This paper proposes a modification to the standard contract in the form of a transferable put, which would intr oduce market-based incentives to the disposition of failed bank assets .