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Quantifying and Explaining Implicit Public Guarantees for European Banks

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  • Oana Toader

    (LEO - Laboratoire d'Économie d'Orleans - CNRS - Centre National de la Recherche Scientifique - Université de Tours - UO - Université d'Orléans)

Abstract

This study provides estimations of public implicit guarantees over the period 1997 to 2012 using a rating-based model. The investigation focuses on a sample of 45 large, listed European banks. It appears that the main element for determining the value of the public subsidy is the intrinsic strength of the bank. In addition, we provide evidence on the importance of guarantor strength on the value of the implicit guarantee: a higher sovereign rating of a bank‟s home country leads to larger implicit subsidies for bank' debt. Our findings also suggest that the recently observed decrease in the value of implicit subsidies goes beyond the decline in European sovereigns' strength. Rather, it is consistent with the implementation of resolution regimes and practices moving from a "bail-out" resolution policy to "bail-in" recapitalizations. Bank insolvencies would be handled in a more explicit context. Therefore, expectations on implicit public support are reduced.

Suggested Citation

  • Oana Toader, 2014. "Quantifying and Explaining Implicit Public Guarantees for European Banks," Working Papers halshs-01015376, HAL.
  • Handle: RePEc:hal:wpaper:halshs-01015376
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01015376
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    Cited by:

    1. Giovanni Covi & Ulrich Eydam, 2020. "End of the sovereign-bank doom loop in the European Union? The Bank Recovery and Resolution Directive," Journal of Evolutionary Economics, Springer, vol. 30(1), pages 5-30, January.
    2. Marta Gómez-Puig & Simón Sosvilla-Rivero & Manish K. Singh, 2015. "“Sovereigns and banks in the euro area: a tale of two crises”," IREA Working Papers 201504, University of Barcelona, Research Institute of Applied Economics, revised Jan 2015.
    3. Leanza, Luca & Sbuelz, Alessandro & Tarelli, Andrea, 2021. "Bail-in vs bail-out: Bank resolution and liability structure," International Review of Financial Analysis, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    banks; implicit subsidy; ratings; resolution; garantie publique implicite; banques; régulation; résolution bancaire; rating;
    All these keywords.

    JEL classification:

    • 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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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