3 Issuing costs of state guaranteed bonds - Financial Risk and ...

Executive summary
Member States (Cyprus, Finland, France, Germany, Hungary, Latvia, Lithuania, Luxembourg,
Poland, Portugal, Spain, Slovakia, United Kingdom).
The majority of banks participating in the state guarantee scheme issued only state-guaranteed
bonds during the period covered by the study while a minority issued both state guaranteed and
non-state guaranteed bonds.
The majority of state guaranteed bond issues had a maturity of 3 to 5 years, the maximum tenor
permitted under the scheme.
Empirical analysis of issuing costs
The statistical analysis of the impact of the provision of a state guarantee to a short- to mediumterm
bond issue shows that, on average, the market value of state guarantees was 33bps.
The empirical result that the presence of a state guarantee reduces issuance costs is robust across
a number of models and variable specifications. But, the estimated magnitude of the impacts
varies somewhat, ranging from 18 bps to 57 bps.
A more detailed estimation, allowing for impact to vary across the actual size of issuance costs
shows that, with the exception of the banks facing the highest issuance costs, the estimated
impact of state guarantees on issuance costs increases with the level of issuance costs.
Moreover, there is evidence of a ratings upgrade effect insofar as state guarantees had a sizeable
statistically significant impact on the issuing costs of bonds rated BBB-/BBB/BBB+, in the order of
over 200bps.
While each individual state guaranteed bond issue benefited from the state guarantee through a
lower issue cost, all bond issues (state guaranteed and non-state guaranteed) were impacted
negatively by the overall volume of SG bond issues during a month. Quantitatively, each bond
issue faced a higher issuance cost of 10.5bps, on average, as a result of the overall volume of SG
issuance activity in a given month.
Moreover, this negative impact is marginally higher for non-state guaranteed bonds issued by
banks which did not participate in the scheme (0.07 bps for each tranche of €1billion in state
guaranteed bonds issued) than for bonds (state guaranteed and non-state guaranteed) issued by
participating banks. In the case of the latter, only state guaranteed bond issues were impacted.
This indirect effect is entirely domestic as the monthly volume of state guaranteed bond issues
outside a Member State is not found to impact on the issuance cost of state guaranteed and nonstate
guaranteed bonds in the domestic market.
Empirical analysis of the impact on bank lending, funding and profitability performance
The impact on bank lending, funding and profitability of the provision of state guarantees to bond
issues by banks varies. A simple, descriptive analysis of the impact of the guarantees provided in
2009 shows that in the following year (i.e., 2010),
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banks having issued guaranteed bonds increased their net loan book by less than banks
having issued noon-guaranteed bonds that would have been eligible;