Working Paper: CEPR ID: DP13709
Authors: Taneli Makinen; Lucio Sarno; Gabriele Zinna
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
JEL Codes: G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Implicit government guarantees (H81) | risk premium in bank asset returns (G21) |
| Strength of a bank's guarantee (G33) | risk premium (G19) |
| Aggregate state of the economy (E10) | risk premium associated with guarantees (G22) |
| Riskiness of guarantees (D81) | risk premium (G19) |
| Banks with higher deposit-to-GDP ratios (F65) | exposure to sovereign risk (F34) |
| Government support (H53) | perceived risk associated with government support before bail-in regulations (G28) |
| Nature of government guarantees (H81) | risk premium in safe-haven countries (G15) |