The ‘Celtic Crisis’: Guarantees, transparency, and systemic liquidity risk
AbstractBank liability guarantee schemes have traditionally been viewed as costless measures to shore up investor confidence and stave off bank runs. However, as the experiences of some European countries, most notably Ireland, have 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 systemic linkage 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 numerically, we show how its credibility may be improved through policies that promote balance sheet transparency. We explain the asymmetry in risk-transfer between sovereign and banking sector, following the introduction of a guarantee as being attributed to the resolution of strategic uncertainties held by bank depositors and the opacity of the banks’ balance sheets.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2013-025.
Length: 44 pages
Date of creation: May 2013
Date of revision:
bank debt guarantees; transparency; bank default; sovereign default; global games;
Other versions of this item:
- König, Philipp & Anand, Kartik & Heinemann, Frank, 2013. "The ‘Celtic Crisis’: Guarantees, transparency, and systemic liquidity risk," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79747, Verein für Socialpolitik / German Economic Association.
- Philipp König & Kartik Anand & Frank Heinemann, 2013. "The ‘Celtic Crisis’: Guarantees, Transparency and Systemic Liquidity Risk," Working Papers 13-31, Bank of Canada.
- G01 - Financial Economics - - General - - - Financial Crises
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-24 (All new papers)
- NEP-BAN-2013-05-24 (Banking)
- NEP-EEC-2013-05-24 (European Economics)
- NEP-RMG-2013-05-24 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rochet, Jean-Charles & Vives, Xavier, 2004.
"Coordination Failures and the Lender of Last Resort : Was Bagehot Right After All?,"
IDEI Working Papers
294, Institut d'Économie Industrielle (IDEI), Toulouse.
- Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
- Rochet, Jean-Charles & Vives, Xavier, 2002. "Coordination failures and the lender of last resort : was Bagehot right after all?," HWWA Discussion Papers 184, Hamburg Institute of International Economics (HWWA).
- Rochet, Jean Charles & Vives, Xavier, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," CEPR Discussion Papers 3233, C.E.P.R. Discussion Papers.
- Jean-Charles Rochet & Xavier Vives, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," FMG Discussion Papers dp408, Financial Markets Group.
- Jean-Charles Rochet & Xavier Vives, 2002. "Coordination failures and the lender of last resort: was Bagehot right after all?," LSE Research Online Documents on Economics 24928, London School of Economics and Political Science, LSE Library.
- Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
- De Paoli, Bianca & Hoggarth, Glenn & Saporta, Victoria, 2009. "Output costs of sovereign crises: some empirical estimates," Bank of England working papers 362, Bank of England.
- Hoggarth, Glenn & Reis, Ricardo & Saporta, Victoria, 2002.
"Costs of banking system instability: Some empirical evidence,"
Journal of Banking & Finance,
Elsevier, vol. 26(5), pages 825-855, May.
- Glenn Hoggarth & Ricardo Reis & Victoria Saporta, 2001. "Costs of banking system instability: some empirical evidence," Bank of England working papers 144, Bank of England.
- John Taylor & John Williams, 2008. "Further Results on a Black Swan in the Money Market," Discussion Papers 07-046, Stanford Institute for Economic Policy Research.
- John B. Taylor & John C. Williams, 2008.
"A black swan in the money market,"
Working Paper Series
2008-04, Federal Reserve Bank of San Francisco.
- John B. Taylor & John C. Williams, 2009. "A black swan in the money market," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
- John C. Williams & John B. Taylor, 2009. "A Black Swan in the Money Market," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 58-83, January.
- Eduardo Borensztein & Ugo Panizza, 2008.
"The Costs of Sovereign Default,"
IMF Working Papers
08/238, International Monetary Fund.
- Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
- Hyun Song Shin, 2012. "Global Banking Glut and Loan Risk Premium," IMF Economic Review, Palgrave Macmillan, vol. 60(2), pages 155-192, July.
- Viral V. Acharya & Itamar Drechsler & Philipp Schnabl, 2011.
"A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk,"
NBER Working Papers
17136, National Bureau of Economic Research, Inc.
- Acharya, Viral V & Drechsler, Itamar & Schnabl, Philipp, 2011. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," CEPR Discussion Papers 8679, C.E.P.R. Discussion Papers.
- Itay Goldstein, 2005. "Strategic Complementarities and the Twin Crises," Economic Journal, Royal Economic Society, vol. 115(503), pages 368-390, 04.
- Chui, Michael & Gai, Prasanna & Haldane, Andrew G., 2002.
"Sovereign liquidity crises: Analytics and implications for public policy,"
Journal of Banking & Finance,
Elsevier, vol. 26(2-3), pages 519-546, March.
- Michael Chui & Prasanna Gui & Andrew G Haldane, 2000. "Sovereign liquidity crises: analytics and implications for public policy," Bank of England working papers 121, Bank of England.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Michael M. Hutchison & Ilan Neuberger, .
"How Bad Are Twins? Output Costs of Currency and Banking Crises,"
EPRU Working Paper Series
02-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Hutchison, Michael M & Noy, Ilan, 2005. "How Bad Are Twins? Output Costs of Currency and Banking Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(4), pages 725-52, August.
- Michael Hutchison & Ilan Noy, 2002. "How bad are twins? output costs of currency and banking crises," Pacific Basin Working Paper Series 2002-02, Federal Reserve Bank of San Francisco.
- Kasahara, Tetsuya, 2009. "Coordination failure among multiple lenders and the role and effects of public policy," Journal of Financial Stability, Elsevier, vol. 5(2), pages 183-198, June.
- Christina E. Bannier & Frank Heinemann, 2005. "Optimal Transparency and Risk-Taking to Avoid Currency Crises," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(3), pages 374-, September.
- Axel Lindner, 2006.
"Does Transparency of Central Banks Produce Multiple Equilibria on Currency Markets?,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 108(1), pages 1-14, 03.
- Axel Lindner, 2003. "Does Transparency of Central Banks Produce Multiple Equilibria on Currency Markets?," IWH Discussion Papers 178, Halle Institute for Economic Research.
- Heinemann, Frank & Illing, Gerhard, 2002.
"Speculative attacks: unique equilibrium and transparency,"
Journal of International Economics,
Elsevier, vol. 58(2), pages 429-450, December.
- Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: Unique equilibrium and transparency," Munich Reprints in Economics 19430, University of Munich, Department of Economics.
- Russell Cooper, 2012. "Fragile Debt and the Credible Sharing of Strategic Uncertainty," NBER Working Papers 18377, National Bureau of Economic Research, Inc.
- Amil Dasgupta, 2004. "Financial Contagion Through Capital Connections: A Model of the Origin and Spread of Bank Panics," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1049-1084, December.
- Poeschel, Friedrich, 2012.
"Assortative matching through signals,"
Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century
62061, Verein für Socialpolitik / German Economic Association.
- Poeschel, Friedrich, 2012. "Assortative matching through signals," IAB Discussion Paper 201215, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
- Friedrich Poeschel, 2013. "Assortative matching through signals," 2013 Papers ppo178, Job Market Papers.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RDC-Team).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.