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

Author

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  • 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
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    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.
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    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

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