IDEAS home Printed from https://ideas.repec.org/a/lrc/lareco/v3y2015i5p19-32.html
   My bibliography  Save this article

Valuing guaranteed bank debt: Role of strength and size of the bank and the guarantor

Author

Listed:
  • Sebastian Schich

    (Organization for Economic Cooperation and Development (OECD))

  • Arturo Estrella

    (a Rensselaer Polytechnic Institute, USA.)

Abstract

A contingent claims model of the value of sovereign guarantees of bank debt shows that the value decreases with the bank’s own creditworthiness and it increases with that of the sovereign as well as with bank and sovereign size. Using cross-sectional data for 188 large banks world-wide from 2007 to 2013, empirical results are consistent with the model’s implications, suggesting that the implicit support for a bank is higher when the bank is larger, when the bank is weaker, and when the country in which the bank is headquartered is larger or more creditworthy. While bank-specific factors matter as well as those related to the sovereign of the country where the bank is located, the effect on the value of sovereign guarantees of changes in bank strength dominate those in sovereign strength.

Suggested Citation

  • Sebastian Schich & Arturo Estrella, 2015. "Valuing guaranteed bank debt: Role of strength and size of the bank and the guarantor," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 3(5), pages 19-32, October.
    • Handle: RePEc:lrc:lareco:v:3:y:2015:i:5:p:19-32
    as

    Download full text from publisher

    File URL: http://journalofeconomics.org/index.php/site/article/view/165/112
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sebastian Schich & Sofia Lindh, 2012. "Implicit guarantees for bank debt: where do we stand?," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2012(1), pages 45-63.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. Ueda, Kenichi & Weder di Mauro, B., 2013. "Quantifying structural subsidy values for systemically important financial institutions," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3830-3842.
    4. Johnson, Herb & Stulz, Rene, 1987. "The Pricing of Options with Default Risk," Journal of Finance, American Finance Association, vol. 42(2), pages 267-280, June.
    5. Estrella, Arturo, 1998. "A New Measure of Fit for Equations with Dichotomous Dependent Variables," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 198-205, April.
    6. Aviram Levy & Sebastian Schich, 2010. "The Design of Government Guarantees for Bank Bonds: Lessons from the Recent Financial Crisis," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2010(1), pages 35-66.
    7. Sebastian Schich, 2013. "How to reduce implicit bank debt guarantees?," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 21(4), pages 308-318, November.
    8. Frank Packer & Nikola Tarashev, 2011. "Rating methodologies for banks," BIS Quarterly Review, Bank for International Settlements, June.
    9. Kevin Fergusson & Eckhard Platen, 2006. "On the Distributional Characterization of Daily Log-Returns of a World Stock Index," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(1), pages 19-38.
    10. Stulz, ReneM. & Johnson, Herb, 1985. "An analysis of secured debt," Journal of Financial Economics, Elsevier, vol. 14(4), pages 501-521, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dr. Nicole Allenspach & Oleg Reichmann & Javier Rodriguez-Martin, 2021. "Are banks still 'too big to fail'? - A market perspective," Working Papers 2021-18, Swiss National Bank.
    2. Mario Bellia & Sara Maccaferri & Sebastian Schich, 2022. "Limiting too-big-to-fail: market reactions to policy announcements and actions," Journal of Banking Regulation, Palgrave Macmillan, vol. 23(4), pages 368-389, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Arturo Estrella & Sebastian Schich, 2012. "Sovereign and Banking Sector Debt: Interconnections through Guarantees," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2011(2), pages 21-45.
    2. Rainer Masera, 2014. "CRR/CRD IV: the trees and the forest," PSL Quarterly Review, Economia civile, vol. 67(271), pages 381-422.
    3. Yu-Li Huang & Chung-Hua Shen & Kun-Li Lin, 2022. "Did the rating standard for banks change after the crisis?," Review of Quantitative Finance and Accounting, Springer, vol. 58(4), pages 1617-1663, May.
    4. Toader, Oana, 2015. "Quantifying and explaining implicit public guarantees for European banks," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 136-147.
    5. Antzoulatos, Angelos A. & Tsoumas, Chris, 2014. "Institutions, moral hazard and expected government support of banks," Journal of Financial Stability, Elsevier, vol. 15(C), pages 161-171.
    6. Scott E. Page, 2012. "A complexity perspective on institutional design," Politics, Philosophy & Economics, , vol. 11(1), pages 5-25, February.
    7. Oliver Denk & Boris Cournède, 2015. "Finance and income inequality in OECD countries," OECD Economics Department Working Papers 1224, OECD Publishing.
    8. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    9. Javed Ahmed & Christopher Anderson & Rebecca Zarutskie, 2015. "Are the Borrowing Costs of Large Financial Firms Unusual?," Working Papers 15-10, Office of Financial Research, US Department of the Treasury.
    10. Saiying Deng & Vincent J. Intintoli & Andrew Zhang, 2019. "CEO Turnover, Information Uncertainty, and Debt Contracting," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-54, June.
    11. Andrea Zaghini, 2014. "Bank Bonds: Size, Systemic Relevance and the Sovereign," International Finance, Wiley Blackwell, vol. 17(2), pages 161-184, June.
    12. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    13. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2011.
    14. Koo, Eunho & Kim, Geonwoo, 2017. "Explicit formula for the valuation of catastrophe put option with exponential jump and default risk," Chaos, Solitons & Fractals, Elsevier, vol. 101(C), pages 1-7.
    15. Daniel Snethlage, 2015. "Towards Putting a Price on the Risk of Bank Failure," Treasury Working Paper Series 15/03, New Zealand Treasury.
    16. Olena Havrylchyk, 2018. "Regulatory framework for the loan-based crowdfunding platforms," OECD Economics Department Working Papers 1513, OECD Publishing.
    17. Chengru Hu & Wei Jiang, 2019. "Managerial risk incentives and accounting conservatism," Review of Quantitative Finance and Accounting, Springer, vol. 52(3), pages 781-813, April.
    18. Tölö, Eero & Jokivuolle, Esa & Viren, Matti, 2019. "Has banks' monitoring of other banks strengthened post-crisis? Evidence from the European overnight market," Bank of Finland Research Discussion Papers 22/2019, Bank of Finland.
    19. Harald Hau & Sam Langfield & David Marques-Ibanez, 2013. "Bank ratings: what determines their quality? [Bank risk during the financial crisis: do business models matter?]," Economic Policy, CEPR;CES;MSH, vol. 28(74), pages 289-333.
    20. Arslanalp, Serkan & Liao, Yin, 2014. "Banking sector contingent liabilities and sovereign risk," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 316-330.

    More about this item

    Keywords

    Contingent claims analysis; Implicit guarantees; Risky guarantors; Too-big-to-fail.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lrc:lareco:v:3:y:2015:i:5:p:19-32. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: S Marjan (email available below). General contact details of provider: http://www.journalofeconomics.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.