The ‘Celtic Case’: Guarantees, Transparency and Dual Debt Crises

50 Pages Posted: 1 Apr 2013

See all articles by Philipp König

Philipp König

Technische Universität Berlin (TU Berlin)

Kartik Anand

Deutsche Bundesbank

Frank Heinemann

Berlin Institute of Technology; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 30, 2013

Abstract

Bank liability guarantee schemes have traditionally been viewed as costless measures to shore up investor confidence and stave off bank runs. However, as the experience of some European countries, most notably Ireland, has demonstrated, the credibility and effectiveness of these guarantees is crucially intertwined with the sovereign’s funding risks. Employing methods from the literature on global games, we develop a simple model to explore the functional co-dependence between the rollover risks of a bank and a government, which are connected through the government’s guarantee of bank liabilities. We show the existence and uniqueness of the joint equilibrium and derive its comparative static properties. In solving for the optimal guarantee, we further show that its credibility may be improved through policies that promote balance sheet transparency.

Keywords: bank debt guarantees, transparency, bank default, sovereign default, global games

JEL Classification: G01, G28, D89

Suggested Citation

König, Philipp and Anand, Kartik and Heinemann, Frank, The ‘Celtic Case’: Guarantees, Transparency and Dual Debt Crises (March 30, 2013). Systemic Risk: Liquidity Risk, Governance and Financial Stability. Available at SSRN: https://ssrn.com/abstract=2242229 or http://dx.doi.org/10.2139/ssrn.2242229

Philipp König

Technische Universität Berlin (TU Berlin) ( email )

Straße des 17
Juni 135
Berlin, 10623
Germany

Kartik Anand (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

HOME PAGE: http://www.bundesbank.de/research_kartik_anand

Frank Heinemann

Berlin Institute of Technology ( email )

Strasse des 17. Juni 135
H 52
Berlin, 10623
Germany

HOME PAGE: http://www.macroeconomics.tu-berlin.de/Heinemann.html

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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