Estimating Group Support for German Landesbanken

Benjamin Käfer ()
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Benjamin Käfer: University of Kassel

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: This paper estimates the funding advantage afforded by the joint liability scheme to German Landesbanken. The advantage is estimated by computing the difference between Moody’s baseline credit assessment (BCA), representing the stand-alone rating, and the adjusted BCA incorporating group support assumptions. This notch advantage is then multiplied by time-varying yield spreads between the respective notches and the rating-dependent liabilities. Our methodology estimates the funding advantage that remains when governmental support for banks formerly considered ‘Too Big to Fail’ (TBTF) is substantially reduced or even abolished. We find a substantial monetary funding advantage due to group support assumptions, amounting on average to a multiple of the Landesbanken’s aggregated annual profits. The aggregated observations mask a distinct heterogeneity, with some of the banks being significantly more exposed to the funding advantage than others.

Keywords: Too big to fail; implicit guarantee; support rating; systemic risk; Landesbanken; Haftungsverbund; joint liability scheme; institutional protection scheme; deposit insurance (search for similar items in EconPapers)
JEL-codes: G12 G21 G24 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-cba and nep-ias
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http://www.uni-marburg.de/fb02/makro/forschung/mag ... 5/25-2015_kaefer.pdf First 201525 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201525

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