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Use of Contingent Payment Mechanism in Nonperforming Loan Auctions

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  • Pandey, Ashish
  • Guhathakurta, Kousik

Abstract

This paper identifies a unique application of the contingent payment auction mechanism by banks in the sale of nonperforming loans to privately-held asset management companies. We demonstrate a lack of separation in the auction mechanism used by banks, with the security bid being a combination of cash and debt in a predetermined proportion, leading to an inefficient public policy outcome. Our findings reveal the possibility of moral hazard and adverse selection associated with the contingent payment auction mechanism in the above setting. We also highlight issues involved in considering auction bids as fair market value.

Suggested Citation

  • Pandey, Ashish & Guhathakurta, Kousik, 2023. "Use of Contingent Payment Mechanism in Nonperforming Loan Auctions," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s154461232200695x
    DOI: 10.1016/j.frl.2022.103519
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    References listed on IDEAS

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    More about this item

    Keywords

    Nonperforming loans; Contingent payment auction; Security bids; Asset management companies; Fair value accounting;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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