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Market‐based estimates of implicit government guarantees in European financial institutions
Authors:Lei Zhao
Affiliation:ESCP Europe, France, Labex Refi, France
Abstract:I exploit the price differential of credit default swap (CDS) contracts written on debts with different levels of seniority to measure the implicit government guarantees enjoyed by European financial institutions from 2005 to 2013. I determine that the aggregate guarantee increased substantially during the recent financial crises and peaked at an average of 89 bps in 2011. My analysis suggests that the extent of implicit support depends on the type of financial institutions and there exists a eurozone effect. Further investigation of feedback relationship shows that the guarantee implicitly offered by a government positively ‘Granger causes’ the sovereign's default risk.
Keywords:credit default swap  financial crisis  financial institutions  implicit government guarantees  too‐big‐to‐fail
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