Troubled asset relief program, bank interest margin and default risk in equity return: an option-pricing model

  • Authors:

  • Jyh-Jiuan Lin;Ching-Hui Chang;Jyh-Horng Lin

  • Affiliations:

  • Department of Statistics, Tamkang University, Tamsui, Taipei County, Taiwan, R.O.C.;Department of Applied Statistics and Information Science, Ming Chuan University, Gui-Shan District, Taoyuan, Taiwan, R.O.C.;Graduate Institute of International Business, Tamkang University, Tamsui, Taipei County, Taiwan, R.O.C.

  • Venue:
  • WSEAS Transactions on Mathematics
  • Year:
  • 2009

Quantified Score

Hi-index 0.00

Visualization

Abstract

Will banks be willing to sell their toxic loans with the help of the Troubled Asset Relief Program (TARP)? The answer is yes as long as bids are high enough to tempt banks to deal. With the TARP's help, an increase in the toxic loans sold to the government increases the bank's margin and decreases the bank's default probability in equity return when the bank encounters greater risk. This paper concludes that setting up the TARP for the 'bad bank' solution may be a good move for retail banking, resulting in high margin and low default risk when its target banks are willing sellers.