On the Management of Financial Guarantees
Robert C. Merton
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit
Boston University - Department of Finance & Economics
Financial Management, Financial Management Association, Vol. 21, No. 4, Winter 1992
Guarantees of financial contracts, such as loans, deposit insurance, and swaps, pervade the financial system and play an important role in corporate and public finance. This paper develops a framework for analyzing the efficient management of such guarantees in both the private and public sectors. Within the private sector, it explores applications of guarantee management in non-financial corporations as well as financial institutions. Just as there are special advantages to having government rather than private entities provide guarantees, so there are special problems. The paper identifies these advantages and problems and explores some of the tradeoffs between government and private-sector solutions to the guarantee problem. A central point is that the principles for effective management of guarantees are the same, whether in the corporate, financial, or public sectors.
Number of Pages in PDF File: 44
Date posted: September 14, 2009