Bank equity stakes in borrowing firms and financial distress

We derive the optimal financial claim for a bank when the borrowingfirm's uninformed stakeholders depend on the bank to establishwhether the firm is distressed and whether concessions by stakeholdersare necessary. The bank's financial claim is designed to ensurethat it cannot collude with a healthy firm's owners to seekunnecessary concessions or to collude with a distressed firm'sowners to claim that the firm is healthy. To prove that a requestfor concessions has not come from a healthy firm/bank coalition,the bank must hold either a very small or a very large equitystake when the firm enters distress. To prove that a distressedfirm and the bank have not colluded to claim that the firm ishealthy, the bank may need to hold equity under routine financialconditions.