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Estimating the Value of Implicit Government Guarantees to Thai Banks

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  • Kaplan-Appio, Idanna

Abstract

The paper estimates the contingent liability of the Thai government to their banking system prior to the 1997 financial crisis by maximizing a likelihood function that utilizes the established result that deposit insurance can be modeled as a put option on the value of bank assets. The results show that the estimated value of the government guarantee was large and statistically greater than the premium banks paid for this guarantee, suggesting that guarantees provided a subsidy to Thai banks. Additionally, the estimates are able to identify weak banks before the crisis emerged. These results suggest that the estimated value of implicit deposit guarantees can serve as an early warning indicator of banking crises. The paper contrasts the option pricing results with traditional balance sheet indicators, and demonstrates that these alternative indicators are unable to identify weaknesses in the Thai banking systems before the crisis. Copyright 2002 by Blackwell Publishing Ltd.

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  • Kaplan-Appio, Idanna, 2002. "Estimating the Value of Implicit Government Guarantees to Thai Banks," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 26-35, February.
  • Handle: RePEc:bla:reviec:v:10:y:2002:i:1:p:26-35
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    Cited by:

    1. Bartram, Sohnke M. & Brown, Gregory W. & Hund, John E., 2007. "Estimating systemic risk in the international financial system," Journal of Financial Economics, Elsevier, vol. 86(3), pages 835-869, December.
    2. Opiela, Timothy P., 2004. "Was there an implicit full guarantee at financial institutions in Thailand? Evidence of risk pricing by depositors," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 519-541, September.
    3. Ueda, Kenichi & Weder di Mauro, B., 2013. "Quantifying structural subsidy values for systemically important financial institutions," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3830-3842.

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