The Pricing of Bank Debt Guarantees
University 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
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, G38Accepted Paper Series
Date posted: June 30, 2009 ; Last revised: May 31, 2010
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