OECD Journal: Financial Market Trends

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The articles in Financial Market Trends focus on trends, structural issues and developments in financial markets and the financial sector.


Why implicit bank debt guarantees matter

Some empirical evidence

What are the economic effects of implicit bank debt guarantees and who ultimately benefits from them? This paper finds that “financial excesses” – situations where bank credit reaches levels that reduce economic growth – have been stronger in OECD countries characterised by larger values of implicit guarantees and where bank creditors have not incurred losses in bank failure resolution cases. Also, implicit bank debt guarantees benefit financial sector employees and other high-income earners in two ways, increasing income inequality. First, implicit guarantees are likely to raise financial sector pay. This is consistent with the observation of “financial sector wage premia”, or financial sector employees earning in excess of their profile in terms of age, education and other characteristics. Second, implicit guarantees are likely to result in more and cheaper bank lending. If so, well-off people tend to benefit relatively more since household credit is more unequally distributed than income.

JEL classification: D63, E43, G21, G28, O47

Keywords: Bank funding costs, implicit guarantees for bank debt, bank failure resolution, finance and growth, finance and income inequality


JEL: G21: Financial Economics / Financial Institutions and Services / Banks; Depository Institutions; Micro Finance Institutions; Mortgages; O47: Economic Development, Innovation, Technological Change, and Growth / Economic Growth and Aggregate Productivity / Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence; E43: Macroeconomics and Monetary Economics / Money and Interest Rates / Interest Rates: Determination, Term Structure, and Effects; D63: Microeconomics / Welfare Economics / Equity, Justice, Inequality, and Other Normative Criteria and Measurement; G28: Financial Economics / Financial Institutions and Services / Financial Institutions and Services: Government Policy and Regulation
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