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Marking-to-market government guarantees to financial systems – Theory and evidence for Europe

  • Baglioni, Angelo
  • Cherubini, Umberto

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0261560612001568
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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 990-1007

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Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:990-1007
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Bank for International Settlements, 2009. "An assessment of financial sector rescue programmes," BIS Papers, Bank for International Settlements, number 48, May.
  2. Antje Berndt & Iulian Obreja, 2010. "Decomposing European CDS Returns," Review of Finance, European Finance Association, vol. 14(2), pages 189-233.
  3. Hamilton, James D & Flavin, Marjorie A, 1986. "On the Limitations of Government Borrowing: A Framework for EmpiricalTesting," American Economic Review, American Economic Association, vol. 76(4), pages 808-19, September.
  4. Dale F. Gray & Robert C. Merton & Zvi Bodie, 2006. "A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy," NBER Working Papers 12637, National Bureau of Economic Research, Inc.
  5. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
  6. Ejsing, Jacob & Lemke, Wolfgang, 2009. "The Janus-headed salvation: sovereign and bank credit risk premia during 2008-09," Working Paper Series 1127, European Central Bank.
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