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

2 Overview of state guarantee schemes
The majority of participating banks issued SG bonds only while a minority issued both SG
bonds and non-SG bonds.
This finding is interesting because it suggests banks were either unable to access
wholesale funding markets at reasonable issuing costs or bank were substituting different
forms of funding. Section 3 (on issuing cost) and Section Error! Reference source not
found. (on funding outcomes) explores these issues further.
Banks taking up state guarantees were issuing bonds at the top end of the permitted
range for maximum tenor.
This is pertinent in regard to the principle of providing time-limited support advocated in
the design of guarantee schemes, as it appears banks were seeking to issue relatively longdated
debt through state guarantees.
In terms of fees, banks had to pay a risk-based price for SG bonds. This provision implies
access to state guarantees are based on market-based principles, i.e., pricing accounts for
credit risk.
Despite this, when considering sovereign ratings versus issuer ratings against issuing costs
(captured through credit spreads), one observes that issuance costs of SG bonds tend to
follow sovereign ratings more than issuer ratings. This aspect of the state guarantees
schemes is reviewed in greater detail in Section 3 .
Finally, Member States differ in regard to bond terms and conditions in the event of
default. This may affect the credit risk embedded in SG bonds issued by banks in different
Member States, a point that is further examined in Section 3 as well.
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