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Risky bank guarantees

Taneli Mäkinen (), Lucio Sarno () and Gabriele Zinna

Journal of Financial Economics, 2020, vol. 136, issue 2, 490-522

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.

Keywords: Banks; Sovereign risk; Risk premium; Government guarantee (search for similar items in EconPapers)
JEL-codes: G12 G15 G21 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Risky bank guarantees (2019) Downloads
Working Paper: Risky Bank Guarantees (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:136:y:2020:i:2:p:490-522

DOI: 10.1016/j.jfineco.2019.10.005

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