“…quently, the ratings-based approach seems to be the preferred quantification method among national treasury departments and central banks (Schich and Aydin 2014). is also observed by Noss and Sowerbutts (2012).…”
mentioning
confidence: 62%
“…Using average yield spreads of former investigations is not a viable option. Berge et al (2006) estimate the value of one rating notch to be around 20 basis points; while Schich et al (2014) state that the value of one notch recently amounts to around 50 basis points on average. This shows that working with an average value would be as insufficient as working with uniform rating-dependent liabilities would be, because yield spreads are time-varying, depending on the current state of the financial markets.…”
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AbstractThis paper estimates the funding advantage afforded by the joint liability scheme to German Landesbanken. The advantage is estimated by computing the difference between Moody's baseline credit assessment (BCA), representing the stand-alone rating, and the adjusted BCA incorporating group support assumptions. This notch advantage is then multiplied by time-varying yield spreads between the respective notches and the rating-dependent liabilities. Our methodology estimates the funding advantage that remains when governmental support for banks formerly considered 'Too Big to Fail' (TBTF) is substantially reduced or even abolished. We find a substantial monetary funding advantage due to group support assumptions, amounting on average to a multiple of the Landesbanken's aggregated annual profits. The aggregated observations mask a distinct heterogeneity, with some of the banks being significantly more exposed to the funding advantage than others.
JEL Classification:G12, G21, G24
Keywords:Too big to fail, implicit guarantee, support rating, systemic risk, Landesbanken, Haftungsverbund, joint liability scheme, institutional protection scheme, deposit insurance
“…quently, the ratings-based approach seems to be the preferred quantification method among national treasury departments and central banks (Schich and Aydin 2014). is also observed by Noss and Sowerbutts (2012).…”
mentioning
confidence: 62%
“…Using average yield spreads of former investigations is not a viable option. Berge et al (2006) estimate the value of one rating notch to be around 20 basis points; while Schich et al (2014) state that the value of one notch recently amounts to around 50 basis points on average. This shows that working with an average value would be as insufficient as working with uniform rating-dependent liabilities would be, because yield spreads are time-varying, depending on the current state of the financial markets.…”
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte.
Terms of use:
Documents in
AbstractThis paper estimates the funding advantage afforded by the joint liability scheme to German Landesbanken. The advantage is estimated by computing the difference between Moody's baseline credit assessment (BCA), representing the stand-alone rating, and the adjusted BCA incorporating group support assumptions. This notch advantage is then multiplied by time-varying yield spreads between the respective notches and the rating-dependent liabilities. Our methodology estimates the funding advantage that remains when governmental support for banks formerly considered 'Too Big to Fail' (TBTF) is substantially reduced or even abolished. We find a substantial monetary funding advantage due to group support assumptions, amounting on average to a multiple of the Landesbanken's aggregated annual profits. The aggregated observations mask a distinct heterogeneity, with some of the banks being significantly more exposed to the funding advantage than others.
JEL Classification:G12, G21, G24
Keywords:Too big to fail, implicit guarantee, support rating, systemic risk, Landesbanken, Haftungsverbund, joint liability scheme, institutional protection scheme, deposit insurance
“…That said, several public authorities have produced estimates of the value of implicit bank debt guarantees or are aware of credible estimates of such values (for example, Noss and Sowerbutts, ; Deutsche Bundesbank, ). Discussions of the results of a survey of self‐assessment among public authorities of the effects of bank regulatory reform on the value of implicit bank debt guarantees conducted by the Committee on Financial Markets of the OECD concluded (Schich and Aydin, ): ‘Despite the measurement difficulties, there was consensus that a reasonably robust measure of implicit bank debt guarantees is a key input to assessing the success of regulatory reform, including changes in resolution methods, in reducing the perception that banks are too‐big, too interconnected or otherwise important to be allowed to fail ’.…”
Section: How Do Markets React To What Policy Makers Say and Do About mentioning
confidence: 99%
“…That said, several public authorities have produced estimates of the value of implicit bank debt guarantees or are aware of credible estimates of such values (for example, Noss and Sowerbutts, 2012;Deutsche Bundesbank, 2016). Discussions of the results of a survey of self-assessment among public authorities of the effects of bank regulatory reform on the value of implicit bank debt guarantees conducted by the Committee on Financial Markets of the OECD concluded (Schich and Aydin, 2014a):…”
Section: How Do Policy Makers Communicate About the Issue Of Implicitmentioning
The expectation by market participants that public authorities might bailout the creditors of banks that are considered too important for financial system stability or another reason to be allowed to fail, is commonly referred to as an implicit guarantee. Public authorities do not have any explicit commitment to intervene; they may even honestly state that they not want to do so ex ante, but may feel compelled to do so ex post. A declared policy aim is to limit the value of implicit guarantees by making banks stronger, more easily resolvable in case of distress, as well as by imposing extra charges that rise as banks become more systemically important. As part of the latter approach, globally systemically important banks are identified and subjected to more costly and intrusive regulation. There is little evidence that specific approach has been successful so far. There is some evidence that the introduction of new resolution frameworks has been helpful, while the use of newly available resolution tools and the involvement of bank creditors in the burden sharing associated with bank failure resolution has significantly reduced the value of implicit bank debt guarantees, where it occurred. In that sense, actions speak louder than words.
“…• As to the issue of what explains the persistence of relatively high values of implicit guarantees on bank debt (see also companion report Schich and Aydin, 2014), respondents noted that the details of the design of bank regulatory and failure resolution reform are still under consideration and various measures have not been fully rolled out, which in part explains such persistence.…”
Bank regulatory reform is expected to limit the value of implicit bank debt guarantees, even if not plainly targeting such values. According to the responses from 35 countries to a survey on implicit bank debt guarantees, there is however no one specific policy capable of fully eliminating the market perception that bank debt is "special". A mixture of several different and complementary policy measures is considered more helpful, with recurrent elements including the implementation of internationally agreed capital and liquidity standards, the tightening of micro-and macro-prudential supervision and making bank failure resolution more effective. As regards the overall thrust of bank regulatory reform efforts, most respondents suggest "strengthening banks" and "strengthening the capacity to withdraw the guarantee function" describes best their own efforts. By contrast, labelling certain policy measures as "effectively charging a user fee" is considered problematic as it might make explicit what currently is at most implicit.
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