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The Pricing of Bank Debt Guarantees

Author

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  • Stefan Arping

    (University of Amsterdam)

Abstract

This discussion paper led to a publication in 'Economics Letters' , 2010, 108(2), 119-121. 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.

Suggested Citation

  • Stefan Arping, 2009. "The Pricing of Bank Debt Guarantees," Tinbergen Institute Discussion Papers 09-057/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20090057
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    File URL: https://papers.tinbergen.nl/09057.pdf
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    References listed on IDEAS

    as
    1. Freixas, Xavier & Rochet, Jean-Charles, 1998. "Fair pricing of deposit insurance. Is it possible? Yes. Is it desirable? No," Research in Economics, Elsevier, vol. 52(3), pages 217-232, September.
    2. Boyd, John H. & Chang, Chun & Smith, Bruce D., 2002. "Deposit insurance: a reconsideration," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1235-1260, September.
    3. Sebastian Schich, 2009. "Expanded government guarantees for bank liabilities: Selected issues," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2009(1), pages 89-123.
    4. Blum, Jurg M., 2002. "Subordinated debt, market discipline, and banks' risk taking," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1427-1441, July.
    5. Alan D. Morrison & Lucy White, 2004. "Is Deposit Insurance a Good Thing, and If So, Who Should Pay for It?," OFRC Working Papers Series 2004fe08, Oxford Financial Research Centre.
    6. Chan, Yuk-Shee & Greenbaum, Stuart I & Thakor, Anjan V, 1992. "Is Fairly Priced Deposit Insurance Possible?," Journal of Finance, American Finance Association, vol. 47(1), pages 227-245, March.
    7. 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, vol. 90(1), pages 147-165, March.
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    Cited by:

    1. Lorenzo Gai & Federica Ielasi, 2014. "Operational drivers affecting credit risk of mutual guarantee institutions," Journal of Risk Finance, Emerald Group Publishing, vol. 15(3), pages 275-293, May.
    2. Andrea Zaghini, 2014. "Bank Bonds: Size, Systemic Relevance and the Sovereign," International Finance, Wiley Blackwell, vol. 17(2), pages 161-184, June.

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    More about this item

    Keywords

    Debt Guarantees; Fair Pricing; Financial Stability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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