Risky Bank Guarantees
100 Pages Posted: 2 Mar 2017 Last revised: 1 May 2019
Date Written: April 27, 2019
Applying standard portfolio-sort techniques to bank asset returns for 15 countries from 2004 to 2018, we uncover a risk premium associated with implicit government guarantees. This risk premium is intimately tied to sovereign risk, suggesting that guaranteed banks, defined as those of particular importance to the national economy, inherit the risk of the guarantor. Indeed, this premium does not exist in safe-haven countries. We rationalize these findings with a model in which implicit government guarantees are risky in the sense that they provide protection that depends on the aggregate state of the economy.
Keywords: Banks, sovereign risk, risk premium, government guarantee
JEL Classification: G23
Suggested Citation: Suggested Citation