12.1 Since the financial crisis intensified what measures have Governments put in place since September 2008? * Capital injections to strengthen banks’ capital base * Explicit guarantees on liabilities to help banks retain access to wholesale funding * Purchases or guarantees of impaired legacy assets to help reduce banks exposure to large losses. The objective of such intervention was to avoid widespread bankruptcies of financial intermediaries and to contribute to restoring a normal functioning of financial intermediation. * Governments became crucial during the crisis, as traditional sources of funding for financial institutions dried up. * Banks’ issuance of debt securities and equity instruments dropped off considerably in the 3rd and 4th quarters of 2008. Bank mergers and acquisitions, which could have provided a private sector solution to bank restructuring, also remained subdued.
12.2 How did Government intervention impact on the CDS premia? * Government interventions have been effective in reducing banks’ default risk, at least over a short time horizon. On average, the announcement of system-wide rescue packages was followed by a fall in CDS premia, especially for announcements of capital injections. * Bank CDS premia have shown a further reduction when the government measures were actually implemented, under both comprehensive rescue programmes and standalone initiatives. * The reduction of default risk is correlated with the amount of resources pledged, in particular with the size of capital injections. * There seem to be positive spillover effects across countries: some countries’ CDS spreads showed “early declines” after the announcements of packages by others.
12.3 What was the impact of government-guaranteed bond issuance on banks’ performance? * The issuance of guaranteed bonds has been sizeable across regions and has provided banks with an important source of funding: as of May 2009, roughly 900 bonds totalling around the equivalent of €700 billion had been issued worldwide by 140 financial institutions. * The guarantees have allowed banks to refinance maturing debt, although the intensity of the rollover differs across intermediaries and countries. For some 50 banks which had bonds maturing over the period examined (October 2008–May 2009), the median rollover ratio was 1.5 (ie issuance of guaranteed debt was equal to one and a half times the amount of matured non-guaranteed debt). * At the country level, the median ratio ranged from 0.5 in Germany to 8.5 in the United Kingdom.
12.4 In view of Government support how did bank financing develop from that point forward? * Government intervention became crucial during the crisis as traditional sources of funding for financial institutions dried up. In particular, financial institutions’ issuance of debt securities and equity instruments dropped off considerably in the third and fourth quarters of 2008. * Merger and acquisition (M&A) activity in the banking sector, which could have provided a private sector solution to bank restructuring, also remained subdued compared to preceding years. Although large-scale government support may have had side effects – for example, by slowing or even crowding out the revival of non-guaranteed funding and private sector investment in the banking sector – it has no doubt played a crucial role in stabilising banking markets, by meeting funding demands that could not have been fulfilled via the traditional channels during the height of the crisis.
12.5 Mention and briefly discuss three developments in terms of bank financing post government support. * Recapitalisations: * Debt guarantees: * Asset purchases or guarantees:
12.6 What has been the effect of government rescue measures on banks? * Unlike CDS spreads, stock prices did not show a