a column by Taneli Mäkinen, Lucio Sarno and Gabriele Zinna for VOX: CEPR’s Policy Portal
During the recent financial crises, government guarantees helped reduce the funding costs of banks by providing them with insurance, thus curbing panic in banking systems and financial markets.
This column argues, however, that these beneficial effects can be attenuated when guarantees are risky in the sense that they offer weaker protection in recessions, when the guarantor is more vulnerable, or the guarantees are less certain. Using a large international panel of banks, a significant risk premium is found to be associated with implicit government guarantees.
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