Why Implicit Bank Debt Guarantees Matter: Some Empirical Evidence

28 Pages Posted: 25 Aug 2015 Last revised: 17 Nov 2017

See all articles by Oliver Denk

Oliver Denk

Organization for Economic Co-Operation and Development (OECD)

Sebastian Schich

Organisation for Economic Co-operation and Development (OECD)

Boris Cournede

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Date Written: April 7, 2015

Abstract

What are the economic effects of implicit bank debt guarantees and who ultimately benefits from them? This paper finds that “financial excesses” – situations where bank credit reaches levels that reduce economic growth – have been stronger in OECD countries characterised by larger values of implicit guarantees and where bank creditors have not incurred losses in bank failure resolution cases. Also, implicit bank debt guarantees benefit financial sector employees and other high-income earners in two ways, increasing income inequality. First, implicit guarantees are likely to raise financial sector pay. This is consistent with the observation of “financial sector wage premia”, or financial sector employees earning in excess of their profile in terms of age, education and other characteristics. Second, implicit guarantees are likely to result in more and cheaper bank lending. If so, well-off people tend to benefit relatively more since household credit is more unequally distributed than income.

Keywords: Bank funding costs, implicit guarantees for bank debt, bank failure resolution, finance and growth, finance and income inequality

JEL Classification: D63, E43, G21, G28, O47

Suggested Citation

Denk, Oliver and Schich, Sebastian and Cournede, Boris, Why Implicit Bank Debt Guarantees Matter: Some Empirical Evidence (April 7, 2015). Financial Market Trends, Vol. 2015, No. 2.. Available at SSRN: https://ssrn.com/abstract=2649924

Oliver Denk

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Sebastian Schich

Organisation for Economic Co-operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France
+33 1 4524 1419 (Phone)
+33 1 4524 9050 (Fax)

Boris Cournede (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France
+33145249037 (Phone)

HOME PAGE: http://www.oecd.org/eco

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