A Two-Stage Call-Put-Pricing Framework for a "Bad Bank" Solution and Bank Profitability

10.6186/IJIMS.2010.21.2.3

Rosemary Jou；Jyh-Horng Lin

Bank Interest Margin ； Troubled Loans ； Capitalization ； Call Option ； Put Option

International Journal of Information and Management Sciences

21：2（2010 / 06 / 01）

143 - 156

英文

With the growth in banking bailout programs has come a growing need to understand the potential effectiveness of these policies. In particular, a ”bad bank” created by regulatory authorities uses funds to buy troubled loans from its selected banks and commits additional capital to them. This paper develops a two-stage call-put pricing framework that is used to study the selected bank's interest margin determination with the bad bank's help. We find that the selected bank's call option-based interest margin is positively related to its troubled loans bought by the bad bank, and to its equity capital inflow from the bad bank. We also show that the call-put option-based value of the bad bank's equity return increases with the selected bank's equity volatility.

1. Black, F.,Scholes M.(1973).The pricing of options and corporate liabilities.Journal of Political Economy,81(3),637-659.
2. Chen, C. W.,Liou, T. S.,Wu, Y. S.(2004).The performance measurement of local banks in the era of the financial liberalization on Taiwan.International Journal Information and Management Sciences,15(4),89-104.
3. Crouhy, M.,Galai D.(1991).A contingent claim analysis of a regulated depository institution.Journal of Banking and Finance,15(1),73-90.
4. Economist(2009).America's toxic-asset plan, Dr. Geithner's bank rehab.Economist,March 28th,69-70.
5. Francis, T.(2009).Creating a bank to take on toxic assets.BusinessWeek,February 9th,22.
6. Hancock, D.(1986).A Model of the financial firm with imperfect asset and deposit elasticities.Journal of Banking and Finance,10(1),37-54.
7. Henry, D.,Goldstein M.,Farzad R.(2009).The fix has not fixed bofa.BusrinessWeek,February 9th,24-25.
8. Hull, J. C.(1993).Options, Futures, and Other Derivative Securities.London:Prentice-Hall International Inc.
9. Karatzas, I.,Shreve S. E.(1998).Methods of Mathematical Finance, New York.New York:Springer-Verlag.
10. Koehn, M.,Santomero A. M.(1980).Regulation of bank capital and portfolio risk.Journal of Finance,35(5),1235-1244.
11. Kreps, D. M.,Wilson R.(1982).Reputation and imperfect information.Journal of Economic Theory,27(2),253-279.
12. Li, C. F.(2008).Lessons from the German experience in bank management: A category-based empirical study.International Journal Information and Management Sciences,19(2),219-236.
13. Lin, J. J.,Chang C. H.,Lin J. H.(2009).Troubled asset relief program, bank interest margin and default risk in equity return: An option-pricing model.WSEAS Transactions on Mathematics,8(3),117-126.
14. Mandel, M.(2009).The 'bad bank' solution.BusinessWeek,February 9th,27.
15. Merton, R. C.(1989).On the application of the continuous-time theory of finance to financial intermediation and insurance.Geneva Papers on Risk and Insurance,14(52),225-261.
16. Scott, M.(2009).Britain's new rescue plan.BusinessWeek,February 9th,28.
17. Vassalou, M.,Xing Y.(2004).Default risk in equity returns.Journal of Finance,59(2),831-868.
18. Wong, K. P.(1997).On the determinants of bank interest margins under credit and interest rate risks.Journal of Banking and Finance,21(2),251-271.
19. Zarruk, E. R.,Madura, J.(1992).Optimal bank interest margin under capital regulation and deposit insurance.Journal of Financial and Quantitative Analysis,27(1),143-149.

1. Tsai, Jeng-Yan(2012).A Note on the Emergency Homeowners' Loan Program: Modeling Bank Equity Volatility.International Journal of Information and Management Sciences,23(2),149-157.