Risky Bank Guarantees

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 Classification: G23

Suggested Citation: Suggested Citation

Mäkinen, Taneli and Sarno, Lucio and Zinna, Gabriele, Risky Bank Guarantees (July 18, 2019). Bank of Italy Temi di Discussione (Working Paper) No. 1232, July 2019, Available at SSRN: https://ssrn.com/abstract=3435148 or http://dx.doi.org/10.2139/ssrn.3435148