- Additional Authors
- Schich, Sebastian.
- Found In
- OECD Journal: Financial Market Trends Vol. 2011, no. 2, p. 21-45 1995-2872
- Description
- 25 p.
- Summary
- Sovereigns effectively provided the function of guarantor-of-last resort in response to the 2008/09 banking crisis, and recent bank funding challenges have led to renewed calls for explicit sovereign bank debt guarantees. The present paper focuses on the interconnections between the values of sovereign and bank debt that arise through sovereign guarantees for banks. We develop a valuation framework based on concepts of contingent claims analysis. In particular, we investigate the value of insurance of risky bank debt when the sovereign providing the guarantee can itself be risky. The framework is in principle applicable both to explicit and implicit guarantees and it is applied here to a measure of implicit external (mostly from the sovereign) support for the debt of a crosssection of 100 large European banks. Consistent with the model, the implicit support is higher, the lower the bank's stand-alone creditworthiness and the higher the sovereign's creditworthiness. These results have implications for pricing sovereign bank debt guarantees, be they provided individually by each sovereign for its domestic banks or by several sovereigns jointly. In the former case, stronger sovereigns should charge higher premiums for their bank debt guarantees for a given bank risk if the aim is to avoid creating distortions to competition. In the latter, they should receive greater allotments of premium incomes even where the share of the guarantees provided are identical among sovereigns.
- Subject
- Finance and Investment
- LCCN
- 10.1787/fmt-2011-5k9cswn0sfxt
- OCLC
- oecd-lib
- Author
Estrella, Arturo .
- Title
Sovereign and Banking Sector Debt [electronic resource]: Interconnections through Guarantees / Arturo Estrella and Sebastian Schich
- Imprint
Paris : OECD Publishing, 2012.
- Connect to:
- Indexed Term
Finance and Investment
- Added Author
Schich, Sebastian.
- Found In:
OECD Journal: Financial Market Trends Vol. 2011, no. 2, p. 21-45 2011:2<21 1995-2872
- Other Standard Identifier
10.1787/fmt-2011-5k9cswn0sfxt doi