Risky Bank Guarantees

Lucio Sarno, Mäkinen, Taneli and Gabriele Zinna

No 13709, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: G23 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Risky bank guarantees (2020)
Working Paper: Risky bank guarantees (2019)
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