THE IMPACT OF STATE GUARANTEES ON BANKS’ RATINGS AND RISK BEHAVIOUR

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Jacob Kleinow, Andreas Horsch

DOI:10.22495/jgr_v3_i1_p3

Abstract

State guarantees are supposed to have positive influence on banks’ ratings as they provide an additional safety net to depositors while lending the guarantor’s creditworthiness to the bank. Based hereupon, we research if and to what extent guarantees perceptibly affect market prices of securities issued by banks. Our results indicate that banks receive governmental rating subsidies of up to 7 notches depending on the region. Furthermore, literature suggests that guarantees and subsequent bailout expectations increase the risk appetite of banks enjoying this governmental support, as protected actors feel less incentivized to apply market discipline. Based hereupon, we consider the possibility of reversed causality: Is the probability of bailouts correlated to a bank’s risk taking? Analysing the drivers of governmental support for different types of banks, we find that governments are particularly willing to bail out (traditional commercial) banks with low returns on investment, or weak share performance, and a higher exposure to risk.

Keywords: TBTF, SIFI, Rating, Systemic Risk, Moral Hazard, Implicit Guarantee

How to cite this paper: Kleinow, J., & Horsch, A. (2014). The impact of state guarantees on banks’ ratings and risk behaviour. Journal of Governance and Regulation, 3(1), 42-57. http://doi.org/10.22495/jgr_v3_i1_p3