OECD work on financial sector guarantees has intensified since the 2008 global financial crisis as most policy responses for achieving and maintaining financial stability have consisted of providing new or extended guarantees for the liabilities of financial institutions. But even before this, guarantees were becoming an instrument of first choice to address a number of financial policy objectives such as protecting consumers, investors and achieving better credit allocations.
These reports analyse guarantees in light of ongoing market developments, incoming data and related analysis and discussions within the OECD Committee on Financial Markets. They show how the perception of the costs and benefits of financial sector guarantees has been evolving in reaction to financial market developments, including the outlook for financial stability.
Reducing and sharing the burden of bank failures, April 2016
Higher capital requirements, bail-in and resolution funds are shown to substantially limit potential government contingent liabilities stemming from failures in the European banking sector. Losses are being shifted from taxpayers to bank creditors and, while this is desirable, they do not disappear. Several challenges in implementing bail-in remain and further efforts are necessary to make them work effectively in practice.
What are the economic effects of implicit bank debt guarantees and who ultimately benefits? This report sheds light on these questions.
Bank regulatory reform measures are expected to limit the value of implicit bank debt guarantees, even if not plainly targeting such values. These survey results, covering 35 countries, show that no single policy is considered capable of fully eliminating the market perception that bank debt is “special”. A mixture of different and complementary measures is seen to hold greater promise.
This report describes the key findings from responses by 35 countries to a survey on implicit guarantees. Policy makers have announced their intention to rein in the values of implicit guarantees so it is important to measure their value to help facilitate the task of assessing progress in reducing their value. While no preferred method for measuring such guarantees exists, the survey shows that their value is substantial, whatever measurement approach is used. In several countries, they represent bank funding cost advantages equivalent to 1% of domestic GDP, with values increasing as much as threefold in financial crisis situations.
The value of implicit guarantees has declined from its peak at the height of the financial crisis, which is consistent with progress made regarding the bank regulatory reform agenda. Implicit guarantees persist however and their value continues to be significant. Bank debt continues to be considered “special” by market participants and this observation implies that the substantial economic distortions, including distortions to risk-taking incentives and competition, arising from this situation also persist.
This report concludes that actual application of bail-ins, involving bondholders in loss sharing, could effectively reign in perceptions of implicit guarantees for bank debt. However, bail-ins are rare owing to concerns about contagion risks and depositor and investor protection, so implicit guarantees persist.
The incidence of perceived implicit guarantees, mostly from governments, for the debt of European banks has decreased recently after several years of increase dating from the beginning of the financial crisis. This reflects to a large extent the deterioration in the strength of the sovereigns that are seen as providing the guarantees.
Systemic financial crises are a recurrent phenomenon, and despite regulatory efforts, they are likely to occur again. This report compares the ex ante funding of deposit insurance schemes in a selection of countries, highlighting the “funding gap” left by these arrangements in the recent systemic financial crisis.
A selection of papers from a Symposium on bank failure resolution and crisis management, in particular, the use of guarantees and the spill-overs between the credit qualities of sovereigns and banking systems.
Guarantee arrangements have proliferated as guarantees have become a preferred policy instrument for addressing financial stability, consumer protection and credit allocation concerns. This report argues that the wider the net of government-supported guarantees for financial promises, the thinner it becomes.
Government-guarantees for bank bonds have been an effective tool for avoiding the worst during the financial crisis. However, the pricing of the guarantees has created competitive distortions and the continued availability of such guarantees for an extended period may have reduced the pressure on some banks to address their weaknesses.
When the crisis struck, governments expanded their role as providers of safety nets for financial institutions by becoming guarantors of last resort. It is questionable whether this function can ever be fully withdrawn. If not, banks should be charged commensurate premium charges in exchange for the provision of this new function.
Government provision of a safety net for financial institutions has been a key element of the policy response to the current crisis. This report discusses pricing and other selected issues related to the recent expansion of guarantees for bank liabilities.
Whenever a crisis hits, interest in guarantee arrangements rises. This paper looks at structural issues relating to how parts of the financial safety net are combined, with a special emphasis on deposit insurance and its interaction with other safety net elements.
The financial crisis brought the adequacy of financial safety nets, including deposit insurance, into the spotlight. This report reviews the issue of deposit insurance and provides a brief overview of some of the key challenges related to the design of explicit deposit insurance systems.
Private bond insurers have traditionally provided guarantees of payments on municipal bonds, but have become increasingly involved as guarantors of elements of various structured financial products. This change in their activity has become the focal point for concerns about the financial health of these entities.