Risky bank guarantees
Accepted version
Peer-reviewed
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Abstract
© 2019 Elsevier B.V. Applying standard portfolio-sort techniques to bank asset returns for 15 countries from 2004 to 2018, we uncover a risk premium associated with implicit government guarantees. This risk premium is intimately tied to sovereign risk, suggesting that guaranteed banks, defined as those of particular importance to the national economy, inherit the risk of the guarantor. Indeed, this premium does not exist in safe-haven countries. We rationalize these findings with a model in which implicit government guarantees are risky in the sense that they provide protection that depends on the aggregate state of the economy.
Description
Keywords
Banks, Sovereign risk, Risk premium, Government guarantee
Journal Title
Journal of Financial Economics
Conference Name
Journal ISSN
0304-405X
Volume Title
136
Publisher
Elsevier