Risky Bank Guarantees

103 Pages Posted: 7 May 2019

See all articles by Taneli Mäkinen

Taneli Mäkinen

Bank of Italy

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Gabriele Zinna

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

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, government guarantee, Risk premium, sovereign risk

JEL Classification: G23

Suggested Citation

Mäkinen, Taneli and Sarno, Lucio and Zinna, Gabriele, Risky Bank Guarantees (May 2019). CEPR Discussion Paper No. DP13709. Available at SSRN: https://ssrn.com/abstract=3383967

Taneli Mäkinen (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Lucio Sarno

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gabriele Zinna

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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