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Estimating the Value of Implicit Government Guarantees to Thai Banks
Author(s) -
KaplanAppio Idanna
Publication year - 2002
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00314
Subject(s) - government (linguistics) , value (mathematics) , subsidy , economics , balance sheet , financial crisis , liability , deposit insurance , business , monetary economics , actuarial science , financial system , finance , macroeconomics , market economy , philosophy , linguistics , machine learning , computer science
The paper estimates the contingent liability of the Thai government to their banking system prior to the 1997 financial crisis by maximizing a likelihood function that utilizes the established result that deposit insurance can be modeled as a put option on the value of bank assets. The results show that the estimated value of the government guarantee was large and statistically greater than the premium banks paid for this guarantee, suggesting that guarantees provided a subsidy to Thai banks. Additionally, the estimates are able to identify weak banks before the crisis emerged. These results suggest that the estimated value of implicit deposit guarantees can serve as an early warning indicator of banking crises. The paper contrasts the option pricing results with traditional balance sheet indicators, and demonstrates that these alternative indicators are unable to identify weaknesses in the Thai banking systems before the crisis.