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

3 Issuing costs of state guaranteed bonds
participating banks, and SG bonds and non-SG bonds. The results of this analysis are presented in
Table 11.
The indirect effect on the issuing costs of banks that received no state guarantees is compared to
that faced by banks that did receive state guarantees. The results are unsurprising insofar as there
is a negative indirect effect on both types of bank in the order of 0.04-0.08bps for each additional
€1bn SG bond issue.
In regard to banks that received state guarantees, this finding indicates that the net effect of SG
bond issuing activity on issuing cost is lower than the direct effect estimated previously once one
accounts for the indirect effect of other SG bonds being issued. On average, €263bn of SG bonds
was issued per month implying that the indirect effect of SG issues on a given bond was -10.5bps
(€263bn*0.0400bps). This means that the net effect of state guarantees was in the order of
22.9bps on average (33.4-10.5).
It is interesting to note that the indirect effect on the issuing costs of banks not issuing SG bonds is
larger than on the issuing costs of banks issuing SG bonds. Indeed, the indirect effect of SG bonds
on the issuing costs of banks not issuing SG bonds is in the order of 20.3bps (€263bn*0.0771bps),
on average.
This difference was investigated in more detail by re-estimating the main empirical specification
for indirect effects on a subsample of SG and non-SG bonds issued by banks participating in state
guarantee schemes only.
Interestingly, the estimated 15 indirect effect on non-SG bonds issued by banks participating in state
guarantee schemes in the order of -0.06bps for each additional €1bn SG bond issue. This suggests
that participation in a state guarantee scheme may signal bank-level financial stability that results
in the issuing cost of non-SG bonds being lower than for otherwise similar non-SG bonds (although
this effect is not significant due to the small sample size).
Re-estimating the main empirical specification on the impact of state guarantees on issuing cost
supports this view. While the average impact of a state guarantee on issuing cost is 33.4bps, the
estimated impact for the subsample of banks issuing both SG bonds and non-SG bonds is 56.7bps.
15 It is important to note that in the context of the analysis of the impact of the issuance of SG bonds on the issuance cost of SG and
non-SG bonds, an externality is defined as negative if the effect of the issuance of SG bonds is to increase the issuance cost of all
bonds and as a positive externality if the effect is to reduce issuance cost.
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