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Improving the monitoring of the value of implicit guarantees for bank debt

Author

Listed:
  • Sebastian Schich
  • Michiel Bijlsma
  • Remco Mocking

Abstract

The value of implicit guarantees has declined from its peak at the height of the financial crisis, which is consistent with progress made regarding the bank regulatory reform agenda, as one would expect that many of the reform measures imply a more limited value of implicit guarantees for bank debt. Implicit guarantees persist however and their value continues to be significant, estimated here to be equivalent to EUR 50 billion of annual funding costs savings for a sample of more than 100 large European banks. This estimated funding cost advantage is a conservative estimate as it only focuses on one type of debt that can be measured in “real-time”, that is as data on credit ratings, debt issuance and prices of debt become available. In any case, bank debt continues to be considered “special” by market participants and this observation implies that the substantial economic distortions, including distortions to risk-taking incentives and competition, arising from this situation also persist.

Suggested Citation

  • Sebastian Schich & Michiel Bijlsma & Remco Mocking, 2014. "Improving the monitoring of the value of implicit guarantees for bank debt," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2014(1), pages 7-37.
    • Handle: RePEc:oec:dafkad:5jxzmkgjnt9x
    DOI: 10.1787/fmt-2014-5jxzmkgjnt9x
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    Citations

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    Cited by:

    1. Oliver Denk & Boris Cournède, 2015. "Finance and income inequality in OECD countries," OECD Economics Department Working Papers 1224, OECD Publishing.
    2. Kevin Davis, 2020. "Regulatory changes to bank liability structures: implications for deposit insurance design," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(1), pages 95-106, March.
    3. Aida Caldera Sánchez & Morten Rasmussen & Oliver Röhn, 2016. "Economic Resilience: What Role for Policies?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-44, June.
    4. Oliver Denk & Sebastian Schich & Boris Cournède, 2015. "Why implicit bank debt guarantees matter: Some empirical evidence," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2014(2), pages 63-88.
    5. Tsafack, Georges & Li, Yifei & Beliaeva, Natalia, 2021. "Too-big-to-fail: The value of government guarantee," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    6. Boris Cournède & Oliver Denk & Peter Hoeller, 2015. "Finance and Inclusive Growth," OECD Economic Policy Papers 14, OECD Publishing.

    More about this item

    Keywords

    Bank regulatory reform; bank funding costs; implicit guarantees for bank debt; debt versus equity funding; quantitative policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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