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

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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. 42
Table 5: Summary of state guarantee schemes, by guarantor 3 Issuing costs of state guaranteed bonds Guarantor Implementation Issue-by date Eligible Eligible instruments Scale of scheme Fee date of scheme institutions* Currency Maximum tenor AT Dec-08 Dec-10* DB,FB All major 5 yrs €70.6bn Varies with credit rating: 70, 100, 150 bp DE Oct-08 Dec-09 DB, FB DC, FC 5 yrs €400bn % of borrowing amount + risk premium DK Oct-08 Dec-10* DB, FB 3 yrs DKK 600bn See annex ES Dec-08 Jun-11* DB, FB DC, FC 3 yrs* €200bn If 1yr 50bp + historic CDS spread EL Nov-08 Dec-10* DB, FB DC, FC 3 yrs €55bn* If 1 50bps* plus fee based on CDS spread FR Oct-08 Dec-09 DB, FB DC, FC 5 yrs €301.5bn Base cost + borrowing bank’s risk level IE Sep-08 Sep-10 DB All major 5 yrs €238.5bn See annex NL Oct-08 Dec-10* DB, FB DC, FC 5 yrs €200bn See annex PT Oct-08 Dec-09 DB, FB DC 3 yrs* €20.5bn If 1yr 50bp + historic CDS spread SE Oct-08 Apr-10* DB, FB All major 5 yrs €167.3bn If 1yr 50bp + historic CDS spread SI Dec-08 Jun-10* DB, FB All 5 yrs €12bn If 1yr 50bp + historic CDS spread UK Oct-08 Dec-09 DB, FB All major 3 yrs £391.5bn 50bp + historic CDS spread* Notes: Eligible institutions: DB= domestic banks/credit institutions; FB= subsidiaries/branches of foreign banks. In some countries institutions other than banks were eligible for the scheme (e.g. insurance companies, pension funds and money market funds). Currency: DC = domestic currency; FC = foreign currency. *Additional details provided in Annex 1 Ad hoc guarantees to banks by BE/LU/FR and BE/LU/NL described in Annex 1 Source: London Economics 43
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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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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