Implicit guarantees for bank debt

Schich, Sebastian; Lindh, Sofia

doi:10.1787/fmt-2012-5k91hbvfkm9v

Cited by 58 publications

(53 citation statements)

References 11 publications

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“…The implicit guarantees on bank debt reduce the funding costs for Swedish banks and might result in excessive risk taking by banks and large contingent liabilities for the government (Schich and Lindh, 2012;IMF, 2012a). The intimate links between certain banks and non-financial firms and the associated connected lending may also add to these risks, though action has been taken to limit such lending (IMF, 2011).…”

Section: The Banking System Is Large and Concentratedmentioning

confidence: 99%

Housing, Financial and Capital Taxation Policies to Ensure Robust Growth in Sweden

McGowan

2013

OECD Economics Department Working Papers

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Section: The Banking System Is Large and Concentratedmentioning

confidence: 99%

Housing, Financial and Capital Taxation Policies to Ensure Robust Growth in Sweden

McGowan

2013

OECD Economics Department Working Papers

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“… Chile's debt nationalisation in 1982 is one example. Alternatively, we follow Schich and Lindh () in using credit rating agencies‘ rating uplifts to proxy the value of implicit guarantees and the results remain unchanged. …”

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Domestic Creditor Rights and External Private Debt

Fan

Gao

2017

The Economic Journal

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This paper unbundles institutions protecting domestic and foreign creditors' rights. We estimate a negative relation between the degree of domestic rights protection and the external stock of private nonguaranteed debt in 85 developing countries. A supply-side explanation is that strong domestic protection supports reliable outside financing options for potential external debt defaulters; foreign investors anticipating this would tighten credit constraints ex ante. Then we formalise the argument in a private borrowing and default model, and show that centralisation is no longer necessarily welfare superior.Creditor rights protection is a critical determinant of developing countries' capacity to accumulate external debt. This is especially the case in the private-sector debt market, where repayment enforcement relies more on third-party institutions than self-enforcing arrangements. However, the literature has overlooked the role played by institutions protecting domestic creditors' rights. Instead, it had naturally concentrated on foreign creditor rights protection in debtor countries. Using variations in institutional quality, this paper examines the effects of domestic creditor rights on external private debt and the consequent welfare implications.Domestic creditor rights were seldom contemplated in prior studies for two reasons. First, external debt of developing countries used to be comprised mostly of sovereign debt, where legal enforcement of rights is minimal. Hence theorists have focused on the economic incentives to repay. 1 Broadly defined measures of institutions suffice to proxy for sovereign creditworthiness. 2 Second, research on external private debt documented only the importance of foreign creditor rights. The * The authors are grateful to the editor Morten Ravn and two anonymous referees. We also thank ) provide a literature review on newly-written theoretical contributions on this topic. 2 Faria and Mauro (2009) construct an index from the World Bank's Worldwide Governance Indicators (WGI) to show that better institutions tilt countries' external capital structures toward equity and away from debt. Lane (2004) and Qian (2012) construct another broad assessment by averaging International Country Risk Guide's (ICRG) IRIS-3 variables from the Political Risk Services group. Lane (2004) emphasises the role of institutions in determining the stock of external public debt and Qian (2012) examines how institutions affect the likelihood of sovereign defaults.

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“…13 A recent example is the case of Heta, the 'bad bank' of Hypo Alpe Adria, where the Austrian government decided on a moratorium for the liabilities of Heta, which were originally backed by governmental guarantees (Handelsblatt 2015c(Handelsblatt , 2015d Two recent papers are methodically close to our study. Schich and Lindh (2012) larger banks receive greater guarantees. Moreover, regressions suggest that parental support is a determinant for governmental support: The stronger the parent, the lower the sovereign support.…”

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“…We have therefore chosen to follow the approach of Schich and Lindh (2012) and use Senior Unsecured Bloomberg Europe Financial BVAL Curves to compare the funding costs of banks with different ratings. We obtain indices for the average yields of Euro-denominated financial bonds with a maturity of 5 years for banks rated AAA, 32 AA, A, and BBB.…”

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The Value of a Joint Liability Scheme: Estimating Group Support for German Landesbanken

Käfer

2016

Applied Economics Quarterly

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis 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. JEL Classification:G12, G21, G24 Keywords:Too big to fail, implicit guarantee, support rating, systemic risk, Landesbanken, Haftungsverbund, joint liability scheme, institutional protection scheme, deposit insurance

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Implicit guarantees for bank debt

Cited by 58 publications

References 11 publications

Housing, Financial and Capital Taxation Policies to Ensure Robust Growth in Sweden

Housing, Financial and Capital Taxation Policies to Ensure Robust Growth in Sweden

Domestic Creditor Rights and External Private Debt

The Value of a Joint Liability Scheme: Estimating Group Support for German Landesbanken

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