Standby Letters of Credit and Bank Default Risk

Ian Sharpe and Tayfun Tuzun

Australian Economic Papers, 1998, vol. 37, issue 2, 152-168

Abstract: This paper examines the relationship between Australian banks' use of standby letters of credit, an off‐balance sheet direct credit sub stitute, and default risk on bank liabilities. We find strong support for the sub‐optimal investment (or under‐investment) hypothesis. Riskier banks, defined as those with higher CD premiums, and those with higher proportions of long‐maturity liabilities make greater use of SLCs than less risky banks. However, there is little evidence of a feed‐back effect from SLCs to bank default risk

Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:bla:ausecp:v:37:y:1998:i:2:p:152-168

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