Default Risk Sharing between Banks and Markets

2013 ◽  
pp. 603-631 ◽  
Author(s):  
Günter Franke ◽  
Jan Pieter Krahnen
Keyword(s):  
Default Risk ◽  
Risk Sharing

scholarly journals Reducing Risk While Sharing It

2020 ◽  
Vol 20 (181) ◽  
Author(s):  
Nicoletta Batini ◽  
Francesco Lamperti ◽  
Andrea Roventini
Keyword(s):  
Moral Hazard ◽  
Default Risk ◽  
Risk Sharing ◽  
Sovereign Default ◽  
Low Risk ◽  
Response Strategy ◽  
Sovereign Default Risk ◽  
Fiscal Risk ◽  
Fiscal Space ◽  
Better Than

The COVID-19 lockdowns have brought about the need of large fiscal responses in all European countries. However, countries across Europe are differently equipped to respond to the shock due to differences in economic conditions and fiscal space. We build on the model by Berger et al. (2019) to compare gains from alternative mechanisms of EU fiscal integration in the presence of moral hazard. We show that any EU response strategy to the COVID-19 crisis excluding mutual financial support to member countries lacks credibility. Some form of fiscal risk sharing is indeed better than none, especially in presence of increasing sovereign default risk of some EU member countries. The moral hazard created by risk sharing can be hedged by introducing some form of fiscal delegation to Brussels. The desirable level of delegation, however, depends on its costs. When these are low, risk sharing and delegation are substitutes and it is optimal to opt for high delegation and low risk sharing. On the contrary, when delegation costs are high, centralization and risk sharing are complements and both are needed. Proposed arrangements at the EU level in response to the COVID-19 shock seem to reflect these basic insights by rotating around a combination of fiscal risk sharing and delegation in the form of fiscal spending conditionality.

scholarly journals DEFAULT RISK DAN PENJAMINAN KREDIT UKM

2005 ◽  
Vol 7 (4) ◽  
Author(s):  
Untoro Untoro
Keyword(s):  
Human Resources ◽  
Default Risk ◽  
Risk Sharing ◽  
Ratio Method ◽  
Credit Allocation ◽  
Large Capacity ◽  
Credit Guarantee ◽  
Medium Scale

This paper asserts that the credit guarantee for the Usaha Kecil Menengah (UKM, Small-Medium Scale Enterprise) is a necessity to encourage the bank to allocate the credit. This allocation requires the identification of the default risk accompanying the credit allocation, after which, we can define the guarantee capacity of the Lembaga Penjaminan Kredit (LPK) and the risk sharing among the parties.Using the Merton method, the result shows the default risk of UKM is 0.7%. Next, we apply this value in the gearing ratio method to calculate the credit guarantee capacity, 142 times of the equity owned by the LPK. On practice, this large capacity should be rationalized to maintain the sustainability of the LPK it self.We analyze five different credit-guarantee schemes based on the involvement of different institutions. The best scheme for a certain region should consider the fund availability and the quality of human resources on the corresponding region.JEL: D81, E51, H81Keyword: Credit guarantee, default risk, Small-Medium Scale Enterprise, UKM, Merton Method, gearing ratio method

scholarly journals Boosting Fiscal Space: The Roles of GDP-Linked Debt and Longer Maturities

2021 ◽  
Author(s):  
Jun Il Kim ◽  
Jonathan D Ostry
Keyword(s):  
Moral Hazard ◽  
Default Risk ◽  
Risk Sharing ◽  
Market Price ◽  
Debt Service ◽  
Debt Ratio ◽  
Short Term ◽  
Borrowing Costs ◽  
Simulation Results ◽  
Fiscal Space

Abstract This paper assesses how issuance of GDP-linked debt and longer-maturity debt, in comparison to short-term debt, can help boost fiscal space for a given path of primary balances. By explicitly linking debt service to repayment capacity, GDP-linked debt helps to stabilize the debt ratio under growth uncertainty and reduces default risk through risk sharing with investors. Longer-maturity nominal debt also helps reduce default risk via state-contingent variation in the market price of debt. Reduced default risk in both cases lowers borrowing costs, and results in higher maximum sustainable debt levels (and fiscal space given initial debt) for a given path of primary balances. Simulation results suggest sizable gains in fiscal space from the introduction of these instruments, though debtor moral hazard could militate against these benefits.

Protecting All: Risk Sharing for a Diverse and Diversifying World of Work

2019 ◽  
Author(s):  
Truman Packard ◽  
Ugo Gentilini ◽  
Margaret Grosh ◽  
Philip O’Keefe ◽  
Robert Palacios ◽  
...  
Keyword(s):  
Risk Sharing

Lending to the Borrower from Hell

2017 ◽  
Author(s):  
Mauricio Drelichman ◽  
Hans-Joachim Voth
Keyword(s):  
United States ◽  
Sixteenth Century ◽  
Sovereign Debt ◽  
Risk Sharing ◽  
The United States ◽  
Philip Ii ◽  
Loan Contracts ◽  
The Right ◽  
Intelligent Model ◽  
New Evidence

Why do lenders time and again loan money to sovereign borrowers who promptly go bankrupt? When can this type of lending work? As the United States and many European nations struggle with mountains of debt, historical precedents can offer valuable insights. This book looks at one famous case—the debts and defaults of Philip II of Spain. Ruling over one of the largest and most powerful empires in history, King Philip defaulted four times. Yet he never lost access to capital markets and could borrow again within a year or two of each default. Exploring the shrewd reasoning of the lenders who continued to offer money, the book analyzes the lessons from this historical example. Using detailed new evidence collected from sixteenth-century archives, the book examines the incentives and returns of lenders. It provides powerful evidence that in the right situations, lenders not only survive despite defaults—they thrive. It also demonstrates that debt markets cope well, despite massive fluctuations in expenditure and revenue, when lending functions like insurance. The book unearths unique sixteenth-century loan contracts that offered highly effective risk sharing between the king and his lenders, with payment obligations reduced in bad times. A fascinating story of finance and empire, this book offers an intelligent model for keeping economies safe in times of sovereign debt crises and defaults.

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