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The Economics of Workout Lending

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  • Herring, Richard J

Abstract

Lenders are forced to consider a workout loan when a borrower loses access to financial markets and must seek loans from existing creditors to continue servicing outstanding loans. A model of the loan decision is developed that distinguishes socially-useful from socially-wasteful workout loans. The analysis is extended to examine two collective-action problems that may arise when many lenders have claims on a troubled borrower. The paper concludes with a consideration of the implications of the model for the establishment of prudential lending limits and of policies to stimulate new lending to troubled debtor countries. Copyright 1989 by Ohio State University Press.

Suggested Citation

  • Herring, Richard J, 1989. "The Economics of Workout Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 1-15, February.
    • Handle: RePEc:mcb:jmoncb:v:21:y:1989:i:1:p:1-15
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    Cited by:

    1. A. Baglioni, 1995. "Incomplete contracts, renegotiation, and the choice between bank loans and public debt issues," The European Journal of Finance, Taylor & Francis Journals, vol. 1(3), pages 257-278.
    2. Yoram Landskroner & Jacob Paroush, 1999. "Sovereign Debt Restructuring and Bank Capital," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(2), pages 197-207.
    3. Richard J. Herring & Nathporn Chatusripitak, 2000. "The Case of the Missing Market: The Bond Market and Why It Matters for Financial Development," Center for Financial Institutions Working Papers 01-08, Wharton School Center for Financial Institutions, University of Pennsylvania.

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