We examine the effects of the government guarantee schemes for bank bonds adopted in the aftermath of the Lehman Brothers demise to help banks retain access to wholesale funding. We describe the evolution and the pattern of bond issuance across countries to assess the effect of the schemes. Then we propose an econometric analysis of one striking feature of this new market, namely the significant “tiering” of the spreads paid by banks at issuance, finding that they mainly reflect the characteristics of the guarantor (credit risk, size of rescue measures, timeliness of repayments) and not those of the issuing bank or of the bond itself. In particular, the creditworthiness of the guarantor (measured by the sovereign rating and CDS) itself accounts for almost a third of the spread paid by the “weakest” issuer.
Published in 2011 in: Banks and Bank Systems, v. 6, 3, pp. 16-24
