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Risky bank guarantees

Author

Listed:
  • Taneli M�kinen

    (Bank of Italy)

  • Lucio Sarno

    (Cambridge Judge Business School, University of Cambridge; Cass Business School, City, University of London)

  • Gabriele Zinna

    (Bank of Italy)

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.

Suggested Citation

  • Taneli M�kinen & Lucio Sarno & Gabriele Zinna, 2019. "Risky bank guarantees," Temi di discussione (Economic working papers) 1232, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1232_19
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    More about this item

    Keywords

    banks; sovereign risk; risk premium; government guarantee;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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