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Risky Bank Guarantees

Author

Listed:
  • Makinen, Taneli
  • Sarno, Lucio
  • Zinna, Gabriele

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

  • Makinen, Taneli & Sarno, Lucio & Zinna, Gabriele, 2019. "Risky Bank Guarantees," CEPR Discussion Papers 13709, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13709
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    Keywords

    banks; government guarantee; Risk premium; sovereign risk;

    JEL classification:

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

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