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The Pricing of Bank Debt GuaranteesStefan ArpingUniversity of Amsterdam - University of Amsterdam Business School; Tinbergen Institute November 30, 2009 Economics Letters, Vol. 108, No. 2, 2010 Tinbergen Institute Discussion Paper 09-057/2 Abstract: We develop an asset substitution framework to analyze the desirability of fair pricing of government guarantees for bank liabilities. We find that fair pricing of guarantees is desirable if and only if the banking sector is sufficiently transparent. In opaque banking systems, there is little scope for guarantee premia to adequately reflect banks' actual risk-taking. In this environment, levying guarantee premia on banks merely raises their effective debt burden. This, in turn, exacerbates banks' incentive to take excessive risks.
Number of Pages in PDF File: 9 Keywords: Bank Debt Guarantees, Fair Pricing, Financial Stability JEL Classification: G21, G38 Accepted Paper SeriesDate posted: June 30, 2009 ; Last revised: May 31, 2010Suggested Citation |
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