Premium
Standby Letters of Credit and Bank Default Risk
Author(s) -
Sharpe Ian,
Tuzun Tayfun
Publication year - 1998
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.00012
Subject(s) - maturity (psychological) , business , credit risk , investment (military) , financial system , balance sheet , bank credit , balance (ability) , default risk , default , finance , actuarial science , medicine , psychology , developmental psychology , politics , political science , law , physical medicine and rehabilitation
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