Anginer, Denizde la Torre, AugustoIze, Alain2012-03-192012-03-192011-12-01https://hdl.handle.net/10986/3660The global financial crisis brought public guarantees to the forefront of the policy debate. Based on a review of the theoretical foundations of public guarantees, this paper concludes that the commonly used justifications for public guarantees based solely on agency frictions (such as adverse selection or lack of collateral) and/or un-internalized externalities are flawed. When risk is idiosyncratic, it is highly unlikely that a case for guarantees can be made without risk aversion. When risk aversion is explicitly added to the picture, public guarantees may be justified by the state's natural advantage in dealing with collective action failures (providing public goods). The state can spread risk more finely across space and time because it can coordinate and pool atomistic agents that would otherwise not organize themselves to solve monitoring or commitment problems. Public guarantees may be transitory, until financial systems mature, or permanent, when risk is fat-tailed. In the case of aggregate (non-diversifiable) risk, permanent public guarantees may also be justified, but in this case the state adds value not by spreading risk but by coordinating agents. In addition to greater transparency in justifying public guarantees, the analysis calls for exploiting the natural complementarities between the state and the markets in bearing risk.CC BY 3.0 IGOABOVE MARKET RATESACCESS TO FINANCEAGENCY PROBLEMSAGENTSALLOCATION OF CREDITANNUITIESARBITRAGEASSET MANAGERSASYMMETRIC INFORMATIONAUCTIONBAILOUTBALANCE SHEETSBANK POLICYBANK RUNBIASESBIDBONDBOND ISSUERSBONDSBORROWINGBORROWING CAPACITYBUSINESS DEVELOPMENTBUSINESS DEVELOPMENT BANKCAPITAL ACCUMULATIONCAPITAL INJECTIONSCCCENTRAL BANKSCHECKSCOLLATERAL REQUIREMENTSCOLLECTIVE ACTIONCOLLECTIVE ACTION PROBLEMCOLLECTIVE ACTION PROBLEMSCOLLEGE EDUCATIONCOMMERCIAL BANKCOMMERCIAL BANKSCONFLICTS OF INTERESTCONSUMER CREDITCONTAINING SYSTEMIC RISKCONTRACT ENFORCEMENTCOORDINATION FAILURESCORPORATE FINANCECOST OF CAPITALCOST OF LOANCOST SHARINGCOVERAGECREDIT DEFAULTCREDIT EXPANSIONCREDIT GUARANTEECREDIT GUARANTEESCREDIT MARKETCREDIT MARKETSCREDIT POLICYCREDIT PROGRAMSCREDIT RATIONINGCREDITORSDEBTDEFAULT LOSSESDEGREE OF RISKDEPOSITDEPOSIT GUARANTEESDEPOSIT INSURANCEDEVELOPMENT BANKDEVELOPMENT BANKSDIFFERENTIAL TAXATIONDIRECTED CREDITDISCLOSURE REQUIREMENTSEARNINGSECONOMIES OF SCALEEMPLOYEEENABLING ENVIRONMENTENTREPRENEURENTREPRENEURSEXTERNALITIESFAIR PRICEFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEVELOPMENTFINANCIAL FRAGILITYFINANCIAL INTERMEDIARIESFINANCIAL INTERMEDIATIONFINANCIAL MARKETSFINANCIAL RISKFINANCIAL SERVICESFINANCIAL SERVICES INDUSTRYFINANCIAL STABILITYFINANCIAL SYSTEMFINANCIAL SYSTEMSFISCAL CONSTRAINTSFORM OF CREDITGOVERNMENT GUARANTEESGOVERNMENT INTERVENTIONGRANT PROGRAMSGUARANTEE FUNDSGUARANTEE SCHEMEGUARANTEE SCHEMESGUARANTORGUARANTORSHEALTH INSURANCEHEDGE FUNDSHOLDINGSHOUSEHOLDSHOUSINGIMPERFECT INFORMATIONINCOME DISTRIBUTIONINEQUALITIESINFORMATION ASYMMETRIESINFORMATION ASYMMETRYINFRASTRUCTURE FINANCEINSURANCEINSURANCE MARKETSINSURANCE PREMIUMINTEREST PAYMENTSINTEREST RATEINTEREST RATESINTERNATIONAL BANKINTERNATIONAL FINANCEINVESTMENT DECISIONSINVESTMENT PROJECTSJOINT STOCK COMPANIESJOINT STOCK COMPANYLACK OF COLLATERALLENDERLENDER OF LAST RESORTLENDER-OF-LAST-RESORTLENDERSLIABILITYLIQUIDATIONLIQUIDATION VALUELIQUIDATIONSLIQUIDITYLIQUIDITY RISKLOAN APPLICANTSLOAN DEFAULTLOAN GUARANTEELOAN GUARANTEE PROGRAMLOAN GUARANTEE PROGRAMSLOAN LOSS PROVISIONSLOAN MARKETLOAN MARKETSLOAN PROGRAMSLOAN REPAYMENTLONG-TERM FINANCELONG-TERM INSTRUMENTSLONG-TERM LOANSLOW INTEREST RATESMACROECONOMIC POLICYMANDATESMARKET DEPTHMARKET FAILUREMARKET FAILURESMARKET INEFFICIENCYMARKET LIQUIDITYMARKET PARTICIPANTSMATURITYMDBMORAL HAZARDMORTGAGEMORTGAGE FINANCEMULTILATERAL DEVELOPMENT BANKSMUTUAL FUNDSPARTIAL CREDITPARTIAL GUARANTEEPARTIAL GUARANTEESPARTICIPATION CONSTRAINTSPEER PRESSUREPENSIONPENSION FUNDSPOLICY RESPONSEPOLICY RESPONSESPOLITICAL ECONOMYPRICE RISKPRICE VOLATILITYPRIVATE BANKSPRIVATE INVESTMENTPRIVATE LENDERPRIVATE LENDERSPRIVATIZATIONPROBABILITY OF REPAYMENTPROFITABILITYPUBLIC BANKSPUBLIC INVESTMENTPUBLIC LENDERSPUBLIC POLICYRATE OF RETURNRATING AGENCIESREAL ESTATEREINSURANCEREPAYMENTREPAYMENTSRESERVESRETAIL INVESTORSRETURNSRISK AVERSIONRISK FRONTIERRISK MANAGEMENTRISK NEUTRALRISK PREMIUMRISK TAKINGRISK TRANSFERRULE OF LAWSETTLEMENTSHAREHOLDERSSMALL BUSINESSSMALL BUSINESS LOANSMALL FARMERSSOCIAL WELFARESTATE BANKSTATE BANKINGSTATE BANKSSTATE GUARANTEESTATE GUARANTEESSTATE INTERVENTIONSTATE LOANSTUDENT LOANSTUDENT LOANSSUBSIDIZATIONSWAPSYSTEMIC RISKTAXTAX SYSTEMTRADINGTRANSFER PAYMENTTRANSPARENCYUNDERWRITINGUNEMPLOYMENTWAGESWHOLESALE FUNDINGWorld Bank10.1596/1813-9450-5893