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The ‘Celtic Crisis’: Guarantees, transparency, and systemic liquidity risk


  • König, Philipp
  • Anand, Kartik
  • Heinemann, Frank


Bank liability guarantee schemes have traditionally been viewed as costless measures to shore up investor confidence and stave off bank runs. However, as the experience of some European countries, most notably Ireland, has 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 functional co-dependence 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, we further show that its credibility may be improved through policies that promote balance sheet transparency.

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  • 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.
  • Handle: RePEc:zbw:vfsc13:79747

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    References listed on IDEAS

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    Cited by:

    1. Yu, Sherry, 2017. "Sovereign and bank Interdependencies—Evidence from the CDS market," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 68-84.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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