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Proposal for a Capital Market-Based Guaranty Scheme for the Financial Industry

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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.
   
type journal paper
   
keywords Deposit Insurance, Insurance Guaranty System, Insolvency Protection
   
language English
kind of paper journal article
date of appearance 2014
journal The European Journal of Finance
publisher Taylor & Francis (London)
ISSN 1351-847X
ISSN (online) 1466-4364
DOI 10.1080/1351847X.2012.745007
volume of journal 2014
number of issue online - forthcoming!
page(s) 1-29
review double-blind review
   
profile area SoM - Responsible Corporate Competitiveness (RoCC)
citation Schmeiser, H., Wagner, J., & Zemp, A. (2014). Proposal for a Capital Market-Based Guaranty Scheme for the Financial Industry. The European Journal of Finance, 2014(online - forthcoming!), 1-29, DOI:10.1080/1351847X.2012.745007.