No. 1232 - Risky bank guarantees

Vai alla versione italiana Site Search

by Taneli Mäkinen, Lucio Sarno and Gabriele ZinnaJuly 2019

The paper analyses the effects of implicit government guarantees on bank risk premia, contributing to the literature on banks’ exposures to sovereign risk. A theoretical model in which government guarantees command a risk premium is constructed, and the magnitude of the premium in debt and equity returns of a sample of international banks is quantified.

The results show that a risk premium associated with government guarantees exists in bank asset returns; the premium, which is higher when sovereign risk is more elevated, reduces the beneficial effects of the guarantees on bank funding costs. The analysis also suggests that the introduction of the bail-in regulation has helped to weaken the bank-sovereign nexus because, following this regulatory change, the risk premium attributable to expected government support has fallen.

Published in 2020 in: Journal of Financial Economics, v. 136, 2, pp. 490-522

Full text