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The Pricing of Bank Debt Guarantees

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  • Stefan Arping

    (University of Amsterdam)

Abstract

We analyze the optimal pricing of government-sponsored bank debt guarantees within the context of an asset substitution framework. We show that the desirability of fair pricing of guarantees depends on the degree of transparency of the banking sector: in relatively opaque banking systems, fair pricing exacerbates banks' incentive to take excessive risks, whereas the opposite is true in relatively transparent banking systems.

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File URL: http://papers.tinbergen.nl/09057.pdf
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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-057/2.

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Date of creation: 30 Jun 2009
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Handle: RePEc:dgr:uvatin:20090057

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Web page: http://www.tinbergen.nl

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Keywords: Debt Guarantees; Fair Pricing; Financial Stability;

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References

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  1. Alan D. Morrison & Lucy White, 2004. "Is Deposit Insurance a Good Thing, and If So, Who Should Pay for It?," OFRC Working Papers Series, Oxford Financial Research Centre 2004fe08, Oxford Financial Research Centre.
  2. Chan, Yuk-Shee & Greenbaum, Stuart I & Thakor, Anjan V, 1992. " Is Fairly Priced Deposit Insurance Possible?," Journal of Finance, American Finance Association, American Finance Association, vol. 47(1), pages 227-45, March.
  3. Blum, Jurg M., 2002. "Subordinated debt, market discipline, and banks' risk taking," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(7), pages 1427-1441, July.
  4. Xavier Freixas & Jean Charles Rochet, 1995. "Fair pricing of deposit insurance. Is it possible? Yes. Is it desirable? No," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 130, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 1995.
  5. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 147-165, March.
  6. John H. Boyd & Chun Chang & Bruce D. Smith, 1998. "Deposit insurance: a reconsideration," Working Papers, Federal Reserve Bank of Minneapolis 593, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Andrea Zaghini, 2014. "Bank bonds: size, systemic relevance and the sovereign," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 966, Bank of Italy, Economic Research and International Relations Area.
  2. Zaghini, Andrea, 2014. "Bank bonds: Size, systemic relevance and the sovereign," CFS Working Paper Series 454, Center for Financial Studies (CFS).

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