Government Guarantees
Featured Piece
In this op-ed dated August 13, 2010, FT, "Guarantees would make banks take a look at break-ups", Professors Viral Acharya, Julian Franks shared their thoughts on government guaranteed banks.
In the Media
“Guarantees would make banks take a look at break-ups,” by Professors Viral Acharya, Julian Franks, FT, August 13, 2010.“Systemic Risk and deposit insurance premiums,” by Professor Viral Acharya, Vox, (voxeu.org) September 4, 2009.
“Why government guarantees are a double-edged sword,” by Professors Viral Acharya, Julian Franks, SternFinance.blogspot.com, January 30, 2009.
Papers
ABSTRACT (Click Here for Paper)
While systemic risk the risk of wholesale failure of banks and other financial institutions is generally considered to be the primary reason for supervision and regulation of the banking industry, almost all regulatory rules treat such risk in isolation. In particular, they do not account for the very features that create systemic risk in the first place, such as correlation among banks' investments (Acharya 2009; Acharya and Yorulmazer 2007, 2008); the large size of some banks (O'Hara and Shaw 1990),1 which leads to “fire sale”-related pecuniary externalities; and bank interconnectedness (Allen and Gale 2000; Kahn and Santos 2005). In this paper, we aim to fill this important gap in the design of regulatory tools by providing a normative analysis of how deposit insurance premiums could best be structured to account for systemic risk.
While systemic risk the risk of wholesale failure of banks and other financial institutions is generally considered to be the primary reason for supervision and regulation of the banking industry, almost all regulatory rules treat such risk in isolation. In particular, they do not account for the very features that create systemic risk in the first place, such as correlation among banks' investments (Acharya 2009; Acharya and Yorulmazer 2007, 2008); the large size of some banks (O'Hara and Shaw 1990),1 which leads to “fire sale”-related pecuniary externalities; and bank interconnectedness (Allen and Gale 2000; Kahn and Santos 2005). In this paper, we aim to fill this important gap in the design of regulatory tools by providing a normative analysis of how deposit insurance premiums could best be structured to account for systemic risk.
ABSTRACT (Click Here for Paper)
With governments beginning to implement new financial regulation, the G20 in its recent Pittsburgh summit laid out four principles they will coordinate on:
1. Building high quality capital and mitigating pro-cyclicality;
2. Improving over-the-counter derivatives markets;
3. Arranging better plans for the resolution of cross-border and systemically important financial institutions by end-2010;
4. Reforming compensation practices to support financial stability.
With governments beginning to implement new financial regulation, the G20 in its recent Pittsburgh summit laid out four principles they will coordinate on:
1. Building high quality capital and mitigating pro-cyclicality;
2. Improving over-the-counter derivatives markets;
3. Arranging better plans for the resolution of cross-border and systemically important financial institutions by end-2010;
4. Reforming compensation practices to support financial stability.
ABSTRACT (Click Here for Paper)
There has been much debate about the current banking crisis, but less attention has been paid to the capital budgeting practices at banks and the adverse manner in which mispriced government guarantees have played a role. Viral Acharya, Professor of Finance at London Business School and Stern School of Business, New York, and Julian Franks, Oxera Director and Professor of Finance at London Business School, give their perspective.
There has been much debate about the current banking crisis, but less attention has been paid to the capital budgeting practices at banks and the adverse manner in which mispriced government guarantees have played a role. Viral Acharya, Professor of Finance at London Business School and Stern School of Business, New York, and Julian Franks, Oxera Director and Professor of Finance at London Business School, give their perspective.
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