The â€˜Celtic Crisisâ€™: Guarantees, transparency, and systemic liquidity risk
Bank 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 sovereignâ€™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 governmentâ€™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 banksâ€™ balance sheets.
|Date of creation:||May 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://sfb649.wiwi.hu-berlin.deEmail:
More information through EDIRC
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.:
- Eduardo Borensztein & Ugo Panizza, 2008.
"The Costs of Sovereign Default,"
IMF Working Papers
08/238, International Monetary Fund.
- 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.
- 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.
- Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: Unique equilibrium and transparency," Munich Reprints in Economics 19430, University of Munich, Department of Economics.
- 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.
- 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.
- 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.
- Hyun Song Shin, 2012. "Global Banking Glut and Loan Risk Premium," IMF Economic Review, Palgrave Macmillan, vol. 60(2), pages 155-192, July.
- 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, 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.
- 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.
- 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, 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.
- 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).
- 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.
- 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.
- Russell Cooper, 2012. "Fragile Debt and the Credible Sharing of Strategic Uncertainty," NBER Working Papers 18377, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Glenn Hoggarth & Ricardo Reis & Victoria Saporta, 2001.
"Costs of banking system instability: some empirical evidence,"
Bank of England working papers
144, 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.
- Itay Goldstein, 2005. "Strategic Complementarities and the Twin Crises," Economic Journal, Royal Economic Society, vol. 115(503), pages 368-390, 04.
- Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: unique equilibrium and transparency," Journal of International Economics, Elsevier, vol. 58(2), pages 429-450, December.
- 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.
When requesting a correction, please mention this item's handle: RePEc:hum:wpaper:sfb649dp2013-025. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RDC-Team)
If references are entirely missing, you can add them using this form.