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

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2 Overview of state guarantee schemes Figure 3: Top 20 issuers of bonds among banks receiving state guarantees 22 €mn 0 1,000 2,000 3,000 4,000 5,000 Non-SG bonds UNICAJA CAIXA CATALUNYA AAREAL BANK AG OESTER VOLKSBK CAJA MEDITERRANE RAIFF ZENTRALBK BANCO COM PORTUG ALPHA BANK AE BANCO PASTOR LANDESBK BERLIN DANSKE BANK A/S FORTIS BANK NED BANCAJA SWEDBANK AB HSH NORDBANK AG EFG EUROBANK BANCO POP ESPAN CAJA MADRID ING BANK NV Note: Issuance volumes of greater than €10,000mn (or €10bn) omitted for presentation purposes Source: Bloomberg 2.4 Maturity structures LA CAIXA €mn 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 SG bonds ERSTE GROUP FORTIS BANK NED RAIFF ZENTRALBK ACHMEA HYPOBK CAIXA CATALUNYA CAJA MEDITERRANE SNS BANK ALLIED IRISH BKS BANK OF SCOTLAND BANK OF IRELAND BANCAJA NATIONWIDE BLDG PIRAEUS BANK SA DEXIA CRED SA NY DANSKE BANK A/S NIBC BANK NV CAJA MADRID HSH NORDBANK AG ING BANK NV ALPHA BANK AE State guarantee schemes focused on medium-term instruments. If stated explicitly by guarantors, the maximum tenor is either three or five years. Figure 4 describes the maturity structure of SG bonds actually issued, which shows a clear preference among banks for tenors at the top end of the permitted range. SG bonds with average maturity at issue of three and five years account for 30% and 15% of the population, respectively. The motivation for focusing on medium-term instruments for state guarantees was to ensure that government support was time limited. In addition to restrictions on the maximum tenor for SG bonds, banks could only participate in SG schemes during a limited time window. In some Member States in which it was deemed that the impacts of the financial crisis on the banking sector had not fully alleviated, state guarantee schemes continued for longer, but in others they were discontinued. Annex 1 provides detailed information in this regard.
2 Overview of state guarantee schemes Figure 4: Maturity structure of SG bonds at issue by number of issues at different maturities Number of issuances 400 350 300 250 200 150 100 50 0 Source: Bloomberg 1 - 1.5 1.5 - 2 2 - 2.5 2.5 - 3 3 - 3.5 3.5 - 4 4 - 4.5 4.5 - 5 2.5 Pricing of issuances 2.5.1 Fees Average maturity at issue (yrs) In order to access a state guarantee, banks had to pay an annual fee to the government acting as guarantor of 50 basis points (bps) plus the median five-year CDS spread of the issuing bank over the period January 2007 – August 2008, and in some cases an additional premium based on the credit rating of the issuing bank. The inclusion of a CDS spread measure in the state guarantee fee implies a risk-based structure. The median five-year CDS spread over January 2007 – August 2008 for Fortis Bank, for example, was 91.6 bps implying that it paid 141.6 bps annually on the value of its SG bonds to its guarantors. Nordea Bank, as another example, would have had to pay only 124.3 bps on the value of SG bonds as its median five-year CDS spread over January 2007 – August 2008 was lower – at 74.3 bps. Interestingly, however, Nordea Bank chose not to issue SG bonds, suggesting that its total issuing costs were lower if it issued non-SG bonds. 2.5.2 Issuer versus sovereign credit ratings In general, the range of issuer ratings for SG bonds was relatively large: close to 90% of banks received one of five types of 'A' rating and slightly more than 10% of banks received one of six types of 'B' rating. Despite this, banks of a wide range of creditworthiness were issuing SG bonds at relatively low issuing cost compared to non-SG bonds, as shown in Figure 5. This suggests that issuer credit ratings are relatively unimportant to the pricing of credit risk embedded within SG bonds, and investors treated SG bonds as gaining exposure to sovereign risk. 23
Page 2 and 3: Economic Papers are written by the
Page 4 and 5: Wherever possible London Economics
Page 6 and 7: Contents Page Annex 4 Results of di
Page 8 and 9: Tables, Figures & boxes Page Table
Page 10 and 11: Glossary vi Glossary BGN Bloomberg
Page 12 and 13: Executive summary Member States (Cy
Page 14 and 15: 1 Introduction 1 Introduction 1.1
Page 16 and 17: 1 Introduction 1.4 Research questi
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4 Impact of state guaranteed bonds
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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 1 Eligibility criteria for st
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Annex 2 Comparison of SG and non-SG
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Annex 2 Comparison of SG and non-SG
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Annex 3 Analysis of missing issuin
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Annex 3 Analysis of missing issuing
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Annex 3 Analysis of missing issuing
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Annex 4 of diagnostic tests of issu
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Annex 4 of issuing cost model Figur
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Annex 5 -over model Annex 5 Results
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Annex 5 -over model Figure 25: Anal
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Annex 6 Availability of bank data A
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Annex 6 Availability of bank data T
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Annex 7 Linking Bloomberg and Banks
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Annex 8 Investigation of estimation
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