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The pricing of government-guaranteed bank bonds

Author

Listed:
  • Aviram Levy

    () (Bank of Italy)

  • Andrea Zaghini

    () (Bank of Italy)

Abstract

We examine the effects of the government guarantee schemes for bank bonds adopted in the aftermath of the Lehman Brothers demise to help banks retain access to wholesale funding. We describe the evolution and the pattern of bond issuance across countries to assess the effect of the schemes. Then we propose an econometric analysis of one striking feature of this new market, namely the significant �tiering� of the spreads paid by banks at issuance, finding that they mainly reflect the characteristics of the guarantor (credit risk, size of rescue measures, timeliness of repayments) and not those of the issuing bank or of the bond itself.

Suggested Citation

  • Aviram Levy & Andrea Zaghini, 2010. "The pricing of government-guaranteed bank bonds," Temi di discussione (Economic working papers) 753, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_753_10
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2010/2010-0753/en_tema_753.pdf
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    References listed on IDEAS

    as
    1. Bank for International Settlements, 2009. "An assessment of financial sector rescue programmes," BIS Papers, Bank for International Settlements, number 48, January.
    2. Felton, Andrew & Reinhart, Carmen M. (ed.), 2009. "The First Global Financial Crisis of the 21st Century Part II: June–December, 2008," Vox eBooks, Centre for Economic Policy Research, number p199, April.
    3. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, February.
    4. Ackermann, Josef, 2008. "The subprime crisis and its consequences," Journal of Financial Stability, Elsevier, vol. 4(4), pages 329-337, December.
    5. Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 165-195.
    6. International Monetary Fund, 2009. "How to Stop a Herd of Running Bears? Market Response to Policy Initiatives during the Global Financial Crisis," IMF Working Papers 09/204, International Monetary Fund.
    7. Michele Fratianni & Francesco Marchionne, 2009. "Rescuing Banks from the Effects of the Financial Crisis," Working Papers 2009-04, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    8. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
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    Cited by:

    1. Bank for International Settlements, 2011. "The impact of sovereign credit risk on bank funding conditions," CGFS Papers, Bank for International Settlements, number 43, December.
    2. Andrea Cardillo & Andrea Zaghini, 2012. "The recent trends in long-term bank funding," Questioni di Economia e Finanza (Occasional Papers) 137, Bank of Italy, Economic Research and International Relations Area.
    3. Scott E. Page, 2012. "A complexity perspective on institutional design," Politics, Philosophy & Economics, , vol. 11(1), pages 5-25, February.
    4. Engineer, Merwan H. & Schure, Paul & Gillis, Mark, 2013. "A positive analysis of deposit insurance provision: Regulatory competition among European Union countries," Journal of Financial Stability, Elsevier, vol. 9(4), pages 530-544.

    More about this item

    Keywords

    banks; corporate bonds; financial crisis; government guarantees;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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