Yakov Amihud, Carlo Favero, 19 July 2016

The public debate over how to resolve the problem of Italian banks centres on whether there should be a government bailout, or whether banks’ bondholders should bear the burden. Absent from the discussion is what will happen to the banks’ stockholders, who should theoretically be wiped out before bondholders are asked to undergo a haircut. This column addresses the problem of who will manage the banks if stockholders quit. The Italian government should require banks to issue deep discount rights, which is a coercive way to raise equity and thus strengthen the banks’ balance sheet and their solvency.

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