Marking-to-Market Government Guarantees to Financial Systems: An Empirical Analysis of Europe

35 Pages Posted: 30 Nov 2010

See all articles by Angelo S. Baglioni

Angelo S. Baglioni

Catholic University of the Sacred Heart of Milan

Umberto Cherubini

University of Bologna - Department of Economics

Date Written: November 10, 2010

Abstract

We propose a new index for measuring the systemic risk of default of the banking sector, which is based on a homogeneous version of multivariate intensity based models (Cuadras – Augé distribution). We compute the index for 10 European countries, exploiting the information incorporated in the CDS premia of 44 large banks over the period January 2007 – September 2010. In this way, we provide a market based measure of the liability incurred by the Governments, due to the implicit bail-out guarantees they provide to the financial sector. We find that during the financial crisis the systemic component of the default risk in the banking sector has significantly increased in all countries, with the exception of Germany and the Netherlands. As a consequence, the Governments’ liability implicit in the bail out guarantee amounts to a quite relevant share of GDP in several countries: it is huge for Ireland, lower but still important for the other PIIGS (Italy is the least affected within this group) and for the UK. Finally, our estimate is very close to the overall amount of money already committed in the rescue plans adopted in Europe between October 2008 and March 2010, despite strong cross-country differences: in particular, Germany and Ireland seem to have committed an amount of resources much larger than needed; to the contrary, the Italian Government has committed much less than it should.

Keywords: Banking, Public sector budget, financial crisis

JEL Classification: G21, H63

Suggested Citation

Baglioni, Angelo and Cherubini, Umberto, Marking-to-Market Government Guarantees to Financial Systems: An Empirical Analysis of Europe (November 10, 2010). Available at SSRN: https://ssrn.com/abstract=1715405 or http://dx.doi.org/10.2139/ssrn.1715405

Angelo Baglioni (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, n.1
Milano, 20123
Italy
390272344024 (Phone)
390272342781 (Fax)

Umberto Cherubini

University of Bologna - Department of Economics ( email )

Strada Maggore, 45
Bologna, FI 40125
Italy
+ +39 051 2092615 (Phone)

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