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

Executive summary
however, these banks increased their short-term and long-term funding by more than
banks having issued non-guaranteed bonds and their equity capital by less;
moreover, the banks having issued guaranteed bonds show a worse post-issue profit
performance (measured either by ratio of net interest income to total liabilities and
equity or operating income to total liabilities and equity).
A more detailed statistical analysis shows that the simple categorisation into banks issuing SG
bonds and banks not having issued SG bonds is often not granular enough to assess the full impact
of the state guarantee schemes on various outcomes at the bank level.
The results of the econometric analysis shows banks that issued SG bonds a) lent less than banks
that were eligible to issue SG bonds but did not so and b) reduced their leverage ratio.
Overall, the statistical results presented in the study suggest that the guarantee schemes were
successful in lowering the costs of bond issues of participating banks while having relatively little
distortionary impacts on non-participating banks. Moreover, cross-border spill-overs appear to be
non-existent.
In that regard, to the extent that the objective of the state guarantee schemes was to reduce the
cost of funds for banks, the design of the schemes can be said to have been relevant, appropriate
and well targeted.
Access, however, may have been overly generous in the sense that some issuance of state
guaranteed bonds continued through 2010, a period during which financial market conditions had
stabilised even though they had not yet returned to normal.
More importantly, the detailed statistical analysis suggest that is the intensity of usage of the
guarantee schemes and not mere participation in the scheme which determines whether banks
having participated in the state guarantee schemes expanded their net lending. This observation
suggests that, in the future, one may wish to subject participation in a similar state aid scheme to a
minimum size in order to achieve a positive bank lending impact. Obviously, the minimum
participation size should be determined in relation to the size of the participating bank.
That being said, it is critical to note that a simple comparison of the pre-issue and post-issue
lending, funding and profit performance of participating and non-participating banks shows that
neither of the two sets of banks are homogenous groups and that actual outcomes in terms of
lending, funding and profitability of each bank shows a great dispersion around the mean of each
group.
Therefore, one should be very prudent in drawing any policy conclusions concerning scheme
design and effectiveness with regards to bank outcomes.
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