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Repudiation Risk and Restitution Costs: Toward Understanding Premiums on Insured Deposits

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Author Info
Cook, Douglas O
Spellman, Lewis J
Abstract

This paper contains a theoretical development of the relationship of CD premiums to both the risks of the CD issuer and the third party government guarantor of those deposits. The theoretical development shows that the risk of the guarantor derives from the possibility that the guarantee could be repudiated and/or the restitution of the depositor's claim could be costly. The empirical analysis of the premiums for insured CDs indicates that during the years preceding the ultimate collapse of the FSLIC, the market priced the risk of both the guarantor as well as the firm. The guarantor risk pricing was responsive to the insolvency of the guarantor, the attempts to recapitalize the guarantor and the efforts to resolve the insolvent thrifts. During this eventful time period CD premiums rose to 187 basis points and averaged 79 and 54 basis points. Copyright 1994 by Ohio State University Press.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 26 (1994)
Issue (Month): 3 (August)
Pages: 439-59
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Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:3:p:439-59

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Adam B. Ashcraft, 2006. "Does the market discipline banks? New evidence from the regulatory capital mix," Staff Reports 244, Federal Reserve Bank of New York. [Downloadable!]
  2. Martinez Peria, Maria Soledad & Schmukler, Sergio L., 1999. "Do depositors punish banks for"bad"behavior? : market discipline in Argentina, Chile, and Mexico," Policy Research Working Paper Series 2058, The World Bank. [Downloadable!]
  3. John R. Hall & Thomas B. King & Andrew P. Meyer & Mark D. Vaughan, 2002. "Did FDICIA enhance market discipline on community banks? a look at evidence from the jumbo-CD market," Supervisory Policy Analysis Working Papers 2002-04, Federal Reserve Bank of St. Louis. [Downloadable!]
  4. Vasso Ioannidou & Jan de Dreu, 2006. "The Impact of Explicit Deposit Insurance on Market Discipline," DNB Working Papers 089, Netherlands Central Bank, Research Department. [Downloadable!]
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  5. Demirguc-Kunt, Asli & Huizinga, Harry, 1999. "Market Discipline and Financial Safety Net Design," CEPR Discussion Papers 2311, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Edward J. Kane & Asli Demirguc-Kunt, 2001. "Deposit Insurance Around the Globe: Where Does it Work?," NBER Working Papers 8493, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Kaoru Hosono & Hiroko Iwaki & Kotaro Tsuru, 2005. "Banking Crises, Deposit Insurance, and Market Discipline: Lessons from the Asian Crises," Discussion papers 05029, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  8. anonymous, 1999. "Using subordinated debt as an instrument of market discipline," Staff Studies 172, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Masami Imai, 2006. "Market Discipline and Deposit Insurance Reform in Japan," Wesleyan Economics Working Papers 2006-007, Wesleyan University, Department of Economics. [Downloadable!]
  10. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2006. "Can feedback from the jumbo CD market improve bank surveillance?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 135-175. [Downloadable!]
  11. Adam Ashcraft & Hoyt Bleakley, 2006. "On the market discipline of informationally opaque firms: evidence from bank borrowers in the federal funds market," Staff Reports 257, Federal Reserve Bank of New York. [Downloadable!]
  12. Laeven, Luc, 2002. "Pricing of deposit insurance," Policy Research Working Paper Series 2871, The World Bank. [Downloadable!]
  13. Alexei Karas & William Pyle & Koen Schoors, 2006. "Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia," William Davidson Institute Working Papers Series wp829, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  14. Shizuka Sekita, 2005. "Does Depositors' Discipline by Households Exist? (in Japanese)," Discussion Papers in Economics and Business 05-10, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  15. Andrew Davenport & Kathleen McDill, 2006. "The Depositor Behind the Discipline: A Micro-Level Case Study of Hamilton Bank," Journal of Financial Services Research, Springer, vol. 30(1), pages 93-109, August. [Downloadable!] (restricted)
  16. María Soledad Martínez & Sergio Schmukler, 1999. "Do Depositors Punish Banks For "Bad" Behavior?: Examining Market Discipline In Argentina, Chile, And Mexico," Working Papers Central Bank of Chile 48, Central Bank of Chile. [Downloadable!]
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  17. Karas, Alexei & Pyle, William & Schoors, Koen, 2006. "Sophisticated discipline in a nascent deposit market: Evidence from post-communist Russia," BOFIT Discussion Papers 13/2006, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
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  18. John R. Hall & Thomas B. King & Andrew P. Meyer & Mark D. Vaughan, 2002. "Do jumbo-CD holders care about anything?," Supervisory Policy Analysis Working Papers 2002-05, Federal Reserve Bank of St. Louis. [Downloadable!]
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