Raising equity is best for bank recapitalisation – BIS paper
New capital is preferable to asset sales, which can cause systemic problems, authors say
Regulators should encourage troubled banks to raise equity rather than sell assets, according to a working paper published by the Bank of International Settlements.
The paper, authored by Christoph Bertsch (Sveriges Riksbank) and Mike Mariathasan (KU Leuven), sets out a model in which banks tend to have excessive leverage, leaving them vulnerable to crises. The authors’ mathematical model predicts the consequences of equity- and asset-based recapitalisation strategies.
The model assumes that
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