Proposal for a capital market-based guaranty scheme for the financial industry

Hato Schmeiser, Joël Wagner and Alexandra Zemp

The European Journal of Finance, 2014, vol. 20, issue 12, 1133-1160

Abstract: In this paper, we introduce a capital market-based financial guaranty system as an alternative to current insurance guaranty funds and deposit insurance systems. The guaranty system secures clients' claims for the event of default by the financial company using a special purpose vehicle which issues bonds to investors. The proposed system, analogous to a credit-linked note, consists of one guaranty vehicle for each financial company. In a first step, we present equations in order to derive the two main input parameters of the special purpose vehicle: the premium and the principal. Subsequently, we analyze the impact of different investment actions taken by the financial companies protected by the guaranty vehicle on various shortfall measures. We find that it will be necessary to restrict the investment volume of investors from the financial industry in order to avoid systematic risk within the proposed guaranty scheme. By deriving practical implications, we show that the capital market-based solution has some key benefits compared to current deposit insurance and insurance guaranty schemes.

Date: 2014
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/1351847X.2012.745007 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:20:y:2014:i:12:p:1133-1160

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REJF20

DOI: 10.1080/1351847X.2012.745007

Access Statistics for this article

The European Journal of Finance is currently edited by Chris Adcock

More articles in The European Journal of Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().