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

3 Issuing costs of state guaranteed bonds
3 Issuing costs of state guaranteed bonds
3.1 Introduction
State guarantees were used by Member States to support banks that were solvent but illiquid to
issue debt securities in the maturity spectrum 1-5 years. This was a response to diminished activity
on wholesale funding markets, which involved banks being otherwise unable to access mediumterm
funding at reasonable cost or via alternative sources such as securitisation.
The rationale for state guarantees particularly was to tackle the problem of counterparty risk that
was hampering the proper functioning of wholesale funding markets. In effect, the introduction of
state guarantees was to influence interbank risk premia by transferring risk from banks' balance
sheets to guarantors.
Empirically, previous studies provide mixed evidence. Jochen et al. (2009), for instance finds
evidence of a statistically significant reduction in issuing costs as a result of state guarantees in the
“subprime phase” of the financial crisis but not the latter “global phase” of the financial crisis in
the UK. Moreover, in the Euro area, the global phase saw state guarantees associated with higher
issuing costs. While Panetta et al. (2009) also find that state guarantees to banks reduced issuing
costs; their evidence suggests that guarantor characteristics are major determinants of the
magnitude of the impact of state guarantees on issuing costs. According to Panetta at al. (2009),
the combination of a high sovereign rating, ratio of resources committed to state guarantees as a
proportion of GDP and absolute resource commitment reduced issuing costs by 64bps, on average.
This chapter contributes to this evidence base on the impact of state guarantees to banks by
undertaking like-for-like comparisons across bonds included and not included in state guarantee
schemes having controlled for issue-specific, bank-specific and other factors. As described in our
study strategy, by using a benchmark of bonds not included in state guarantee schemes we
attempt to isolate the pure effect of state guarantees on issuing costs. This is a departure from the
abovementioned body of work that concentrates on SG bonds only, without non-SG bonds as a
reference point.
The key findings of this chapter are as follows. Issuing costs of SG bonds are, on average, 33.4bps
lower than in absence of the guarantee though with a somewhat wide range of 18 bps to 57 bps.
The distribution of impacts varies more widely still. SG bonds with median issuing costs or below
within our sample did not show state guarantees have a statistically significant impact on their
issuing costs. Meanwhile, SG bonds with above (median) average issuing costs saw impacts range
from 63.7bps to 164bps.
Moreover, we note 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.
However, the greater the level of SG bond issuance activity, the larger the issuing costs of any
single bond. Each bond issue faced higher issuing costs of 0.04bps for each tranche of €1billion in
SG bonds issued during the month. On average, this “indirect effect” amounted to raising issuing
costs by 10.5bps.
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