Template-Type: ReDIF-Paper 1.0
Author-Name: Angelo Baglioni
Author-X-Name-First: Angelo
Author-X-Name-Last: Baglioni
Author-Email: angelo.baglioni@unicatt.it
Author-Workplace-Name: DISCE, Università Cattolica
Author-Name: Umberto Cherubini
Author-X-Name-First: Umberto
Author-X-Name-Last: Cherubini
Author-Email: umberto.cherubini@unibo.it

Title: Marking-to-Market Government Guarantees to Financial Systems.Theory and Evidence for Europe
Abstract: We propose a new index for measuring the systemic risk of default of the banking sector, which is
based on a homogeneous version of multivariate intensity based models (Cuadras – Augé distribution). We
compute the index for 10 European countries, exploiting the information incorporated in the CDS premia of
44 large banks over the period January 2007 – September 2010. In this way, we provide a market based
measure of the liability incurred by the Governments, due to the implicit bail-out guarantees they provide to
the financial sector. We find that during the financial crisis the systemic component of the default risk in the
banking sector has significantly increased in all countries, with the exception of Germany and the
Netherlands. As a consequence, the Governments’ liability implicit in the bail out guarantee amounts to a
quite relevant share of GDP in several countries: it is huge for Ireland, lower but still important for the
other PIIGS (Italy is the least affected within this group) and for the UK. Finally, our estimate is very close
to the overall amount of money already committed in the rescue plans adopted in Europe between Octo ber
2008 and March 2010, despite strong cross-country differences: in particular, Germany and Ireland seem to
have committed an amount of resources much larger than needed; to the contrary, the Italian Government
has committed much less than it should.
Length: 19
Creation-Date: 2011-07
File-URL: http://www.unicatt.it/Istituti/EconomiaFinanza/Quaderni/ief0103.pdf
File-Format: Application/pdf
File-Function: First version, 2011
Number: ief0103
Classification-JEL: G21, H63
Keywords: bank bail out, Government budget, systemic risk, financial crisis
Handle: RePEc:ctc:serie3:ief0103