Abstract
The State guarantees based on valuation standards that coexist temporarily with market prices are an appropriate and adequate instrument of prudential regulation in a time of crisis. Therefore, these measures easily find a place in the progress that regulations are making in this field (e.g., Basel III for EU banks). This trend, besides, is only partially countered — for the time being in the United States — by compensatory structural regulation mechanisms (e.g., the Volker rule). Therefore, from an operational point of view, it appears relevant to investigate the EU pricing formula for State guarantees to cover bank debt, a fortiori because it requires that the fees charged for the provision of the guarantee scheme have to be ‘as close as possible to what could be considered a market price’.
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Notes
See: A. Di Cesare, G. Grande, M. Manna, M. Taboga, Recent estimates of sovereign risk premia for euro-area countries, Bank of Italy, Occasional Papers, no. 128, September 2012.
See, for example, EIOPA, Technical specification to the Industry on the Long-Term Guarantee Assessment, draft v05, Eiopa/12/307, 24 August 2012.
See: R. Gropp, C. Gruendl, A. Guettler, The Impact of Public Guarantees on Bank Risk Taking. Evidence from a Natural Experiment, European Central Bank, Working Papers, no. 1272, December 2010;
F. Allen, E. Carletti, I. Goldstein, A. Leonello, Government guarantees and financial stability, 23 April 2013;
L. Brandao-Marques, R. Correa, H. Sapriza, International evidence on government support and risk taking in the banking sector, Board of Governors of the Federal Reserve System, International Finance Discussion Papers, no. 1086, August 2013;
S. Schich, Expanded government guarantees for bank liabilities: selected issues, in OECD Journal: Financial Market Trends, 2009/1;
A. Levy, S. Schich, The design of government guarantees for bank bonds: lessons from the recent financial crisis, in OECD Journal: Financial Market Trends, 2010/1.
See: G. Grande, A. Levy, F. Panetta, A. Zaghini, Public guarantees on bank bonds: effectiveness and distortions, in OECD Journal: Financial Market Trends, 2011/2, pp. 17–19, in the context of the guarantee scheme adopted in the EU in 2008, for banks located in fiscally weak countries such as Italy it was not worth buying insurance from the Treasury because the cost for the bank (the insurance fee) was roughly of the same order of the yield reduction (i.e. the interest saving) made possible by the guarantee… In 2010–11 things got worse and in several euro area countries sovereign credit risk rose above banks credit risk…, implying that the value that banks may extract from a public guarantee is close to nil. As a consequence, in the case of Italy and many other euro area countries a government guarantee on bank bonds would not be able to improve funding conditions of banks to a significant extent, while it would likely worsen the country’s fiscal position, as a consequence of the increase of contingent liabilities’.
See: F. Bassan, C. D. Mottura, Government guarantees and the European model of financial assistance to Member States, in Mercato concorrenza regole, 2013/3, pp. 571–603.
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© 2015 Fabio Bassan and Carlo D. Mottura
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Bassan, F., Mottura, C.D. (2015). Effects of the Guarantees. In: From Saviour to Guarantor. Roma Tre Business and Finance Collection. Palgrave Macmillan, London. https://doi.org/10.1057/9781137441560_8
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DOI: https://doi.org/10.1057/9781137441560_8
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