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

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1 Introduction analysis of the latter’s relationship to key factors such as issuer and sovereign ratings and indicators of confidence in financial markets. These relationships are investigated formally through an estimation of the impact of state guaranteed bonds in issuing costs. In addition, the impact of state guaranteed bonds as a class on the issuing costs of non-state-guaranteed bonds is estimated. Taken together, the results of this section provides empirical results on the trade-off between the effectiveness of state guarantees to banks participating in state guarantee schemes (or receiving ad hoc guarantees) and the extent of spill-over to non-participating banks. Section 4 considers the impact of state guaranteed bonds to banks on a number of bank outcomes, including lending and risk-taking. This section proceeds in a similar fashion to Section 3, first providing a descriptive analysis of changes in key bank outcomes and then reporting formal estimation results of the impacts of state guarantees. Section 5 distils the main findings of the report into policy recommendations. And, Annex 1-Annex 8 provides technical details and other relevant background material. 14
2 Overview of state guarantee schemes 2.1 Introduction 2 Overview of state guarantee schemes The intensification of the financial crisis had marked impacts on the EU banking sector, particularly through 2008Q4. This incited national governments to support financial institutions through a range of rescue programmes, including state guarantees. Through this period, the appropriateness of policy responses taken at Member State level were being weighed, as were the best courses of action for further interventions. The overall conclusion was to implement a coordinated framework based on a set of EU common principles to guide national decision-making regarding interventions. 5 The key motivation for using state guarantees was to enhance the soundness and stability of the banking system, and, overall, to restore confidence and the proper functioning of wholesale funding markets. However, other considerations were also taken into account in the design of state guarantees. Firstly, a distinction was made between financial institutions whose circumstances were due to general market conditions (of the nature described above) but were fundamentally sound and those institutions whose pre-existing weaknesses were exposed through the financial crisis. Specifically, state guarantees were viewed as a suitable intervention for the former group of banks but not the latter. Secondly, there was also a preoccupation to ensure, to the extent possible, a level playing field between banks issuing state guaranteed bonds and other banks, and minimise any competition distortions that might arise from the granting of state guarantees. Reflecting these points, state guarantees shifted from the provision of individual guarantees and moved largely towards generalised schemes. This reflected the systemic scale of the problem and the need for a system-wide solution. It also took into account the potential for fragmentation of wholesale funding markets. Eligibility criteria codified, among other things, the requirement that only solvent banks could take up a state guarantee. More generally, the set-up of schemes with predominantly rules-based rather than discretionary access implied that banks could evaluate whether they wished to participate in state guarantee schemes or not. It was expected that transparent and fair access would help to minimise any potential negative competition. In addition to these specific principles relating to effectiveness, competition issues and market fragmentation, the general policy approach set out conditions specifying the circumstances in which state aid would be justified. Broadly, the criteria relate to the evaluation of whether there is a 'serious disturbance' that would have an immediate impact on the entire economy of a Member 5 Among the key texts highlighting this process are Ecofin Council (2008) and European Commission (2008). 15
Page 2 and 3: Economic Papers are written by the
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5 Key empirical findings and polic
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References Acharya V.V. and Sundara
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Lando, D. (1997). 'Modeling Bonds a
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Annex 5 -over model Annex 5 Results
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Annex 6 Availability of bank data A
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Annex 8 Investigation of estimation
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