The Advantages of "Transferable Puts" for Loans at Failed Banks
In testimony on February 3, 1992 before the Committee on Banking, Housing, and Urban Affairs of the United States Senate, Richard F. Syron, President of the Federal Reserve Bank of Boston, proposed a mechanism to help relieve current credit availability problems by making existing FDIC guarantees of loans transferable throughout the private financial system. This article examines Mr. Syron's rationale for the proposal and how it might work.
Under this scheme, when performing nonperforming loans are placed in the equivalent of "bad banks" by the FDIC, the borrower could transfer the loan to any willing financial institution, bringing along the same government guarantee on the loan that is currently extended to acquirers of failed banks--in effect, making the put transferable. The resulting competition for "puttable" failed bank assets would provide a market for performing nonperforming loans that would reduce the number of liquidated loans and potentially reduce costs to the FDIC.