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

3 Issuing costs of state guaranteed bonds
3.3 Empirical research strategy
The empirical research strategy adopted for assessing the impact of the state guarantees on the
issuing costs of state guaranteed bonds is the counterfactual approach whereby a relevant control
group of non-SG bonds is used for comparison with SG bonds.
The average impact of a state guarantee on issuing cost is estimated by computing the difference
in issuing costs of SG and non-SG bonds, taking into account all the factors determining issuing
costs that are observed and measured.
Note that the average impact does not provide a measure of the value of a state guarantee to
particular banks or bond issues because these differences are controlled for through the inclusion
of other determinants of issuing cost. For instance, it may be of interest to know the value of a
state guarantee to banks that could not access wholesale funding markets at all. However, this
factor cannot be measured because information on the issuing costs that these banks would have
faced in the absence of state guarantees is not available.
3.3.1 Selection of non-SG bonds
The main requirement of the counterfactual approach is that non-SG bonds used in comparison
with the SG bonds should themselves have been eligible for a state guarantee. This is to alleviate
concerns about unobservable differences that may exist between the two groups that could bias
findings regarding the relationship between SG bonds and issuing costs.
The intuition behind this requirement is as follows. If, for instance, non-SG bonds are issued by
banks that are more likely to face insolvency risk (but this cannot be observed), then the issuing
cost of their non-SG bond issues is likely to be relatively high. If these issuing costs are then
compared with that of SG bonds, the difference is likely to be overestimated and some of this
difference may be accredited to the impact of state guarantees. However, the difference would
not be due to state guarantees but due to the relative high insolvency risk of banks issuing non-SG
bonds.
For banks to issue SG bonds they have to meet bank-related and bond-related eligibility criteria
among other things. Therefore, by selecting non-SG bonds that would have been eligible for a
state guarantee for the counterfactual, it is more likely that they are similar to SG bonds, and also
more likely that comparisons between the two groups are valid. Or, put in another way, it is more
likely that estimates of the impact of SG bonds on issuing cost relative to non-SG bonds controlling
for observable factors are unbiased.
Central bank, government and legal reports were analysed in order to identify banks and non-SG
bonds that would have been eligible for SG schemes. Table 5 provides a summary of the findings of
this analysis and Annex 1 provides a detailed description of this research.
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