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Risks 2018, 6(2), 39; https://doi.org/10.3390/risks6020039

How Does Distress Acquisition Incentivized by Government Purchases of Distressed Loans Affect Bank Default Risk?

1
Department of Statistics, Tamkang University, New Taipei City 25137, Taiwan
2
Department of Wealth and Taxation Management, National Kaohsiung University of Science and Technology, Kaohsiung City 82444, Taiwan
3
School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China
*
Author to whom correspondence should be addressed.
Received: 27 January 2018 / Revised: 13 April 2018 / Accepted: 17 April 2018 / Published: 19 April 2018
(This article belongs to the Special Issue Risks in Financial and Real Estate Markets)
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Abstract

The topic of bank default risk in connection with government bailouts has recently attracted a great deal of attention. In this paper, the question of how a bank’s default risk is affected by a distress acquisition is investigated. Specifically, the government provides a bailout program of distressed loan purchases for a strong bank to acquire a bank in distress. The acquirer bank may likely refuse the acquisition with a bailout when the amount of distressed loan purchases is large or the knock-out value of the acquired bank is high. When the acquirer bank realizes acquisition gains, the default risk in the consolidated bank’s equity return is negatively related to loan purchases, but positively to the knock-out value of the acquired bank. The government bailout, as such, in large part contributes to banking stability. View Full-Text
Keywords: distress acquisition; loan purchases; default risk; barrier option distress acquisition; loan purchases; default risk; barrier option
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Lin, J.-J.; Chang, C.-P.; Chen, S. How Does Distress Acquisition Incentivized by Government Purchases of Distressed Loans Affect Bank Default Risk? Risks 2018, 6, 39.

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