Government capital injection, credit risk transfer, and bank performance during a financial crisis

Chuen-Ping Chang and Shi Chen

Economic Modelling, 2016, vol. 53, issue C, 477-486

Abstract: This paper analyzes the interactions between government capital injection and credit risk transfer (CRT) with total return swaps including its impact on lending behavior and default risk of a bank in distress. When the bank acts as a beneficiary in CRT, an increase in the CRT transaction increases the optimal bank interest margin and decreases the default risk in the bank's equity return. When the bank acts as a guarantor, CRT is found to increase the bank interest margin and default risk in a more sensitive way, compared to a situation where government capital injection is increased. Government capital injection is found to increase the bank interest margin and reduce default risk in a more sensitive way, compared to a situation where CRT is increased regardless of whether the bank is a protection buyer or seller. This promotes the intension of government capital injection with CRT to strengthen the profitability and safety for the distressed bank.

Keywords: Barrier option; Bank interest margin; Bankruptcy prediction; Total return swaps; Government capital injection (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999315003429
Full text for ScienceDirect subscribers only

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:eee:ecmode:v:53:y:2016:i:c:p:477-486

DOI: 10.1016/j.econmod.2015.10.046

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().