Abstract
A recent trend in commercial banking has been the rapid growth in the issuance of off-balance, sheet guarantees. Revised capital standards presume that banks are increasing the issuance of off-balance sheet guarantees to generate fee income and conserve primary capital while shifting out of low risk assets. The relationship between standby letters of credit, an off-balance sheet guarantee, and large bank capital is tested using Granger causality, and then estimated in a structural model. To accurately estimate the relationship, a simultaneous equation model is required to capture the positive effect of bank capital on standby letter of credit issuance.
Published Version
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