The Impact of Government Guarantees on Banks’ Wholesale Funding Costs and Risk-taking: Evidence from a Natural Experiment

Luong, TM; Pieters, R; Scheule, H; Wu, E

The Impact of Government Guarantees on Banks’ Wholesale Funding Costs and Risk-taking: Evidence from a Natural Experiment

Luong, TM Pieters, R Scheule, H

Wu, E

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Publisher:: Elsevier
Publication Type:: Journal Article
Citation:: Pacific-Basin Finance Journal, 2020, 61, (J. Financ. 69 2014), pp. 1-20
Issue Date:: 2020

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Field	Value	Language
dc.contributor.author	Luong, TM
dc.contributor.author	Pieters, R
dc.contributor.author	Scheule, H https://orcid.org/0000-0001-7283-5654
dc.contributor.author	Wu, E
dc.date.accessioned	2020-06-05T04:07:02Z
dc.date.available	2020-06-05T04:07:02Z
dc.date.issued	2020
dc.identifier.citation	Pacific-Basin Finance Journal, 2020, 61, (J. Financ. 69 2014), pp. 1-20
dc.identifier.issn	0927-538X
dc.identifier.uri	http://hdl.handle.net/10453/141126
dc.description.abstract	© 2018 Elsevier B.V. This study compares the effects of the introduction and subsequent removal of a unique government Wholesale Funding Guarantee Scheme (WGS) in Australia on the funding costs and loan growth of authorised deposit-taking institutions (ADIs). Our identification strategy exploits the voluntary adoption of the WGS by ADIs using a difference-in-differences estimation approach. We find strong causal evidence to indicate that the government guarantee helped large ADIs to reduce their funding costs relatively more than for smaller ADIs. Furthermore, large ADIs continued to benefit from the WGS beyond the official removal of the government guarantee due to market perceptions of continued implicit government support for the too-big-to-fail banks. We also find that the guarantee encouraged large banks to shift their loan portfolios into housing loans thereby reducing their riskiness. Further tests using guaranteed and non-guaranteed bonds issued by ADIs show that the largest banks experienced a net reduction of 6.2 bps from adopting the government guarantee.
dc.language	en
dc.publisher	Elsevier
dc.relation.ispartof	Pacific-Basin Finance Journal
dc.relation.isbasedon	10.1016/j.pacfin.2018.08.011
dc.rights	info:eu-repo/semantics/restrictedAccess
dc.subject	1501 Accounting, Auditing and Accountability, 1502 Banking, Finance and Investment
dc.subject.classification	Finance
dc.title	The Impact of Government Guarantees on Banks’ Wholesale Funding Costs and Risk-taking: Evidence from a Natural Experiment
dc.type	Journal Article
utslib.citation.volume	61
utslib.for	1501 Accounting, Auditing and Accountability
utslib.for	1502 Banking, Finance and Investment
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Design, Architecture and Building
pubs.organisational-group	/University of Technology Sydney/Faculty of Design, Architecture and Building/School of Architecture
utslib.copyright.status	closed_access	*
pubs.consider-herdc	false
dc.date.updated	2020-06-05T04:06:56Z
pubs.issue	J. Financ. 69 2014
pubs.publication-status	Published
pubs.volume	61
utslib.start-page	1
utslib.citation.issue	J. Financ. 69 2014

Abstract:

© 2018 Elsevier B.V. This study compares the effects of the introduction and subsequent removal of a unique government Wholesale Funding Guarantee Scheme (WGS) in Australia on the funding costs and loan growth of authorised deposit-taking institutions (ADIs). Our identification strategy exploits the voluntary adoption of the WGS by ADIs using a difference-in-differences estimation approach. We find strong causal evidence to indicate that the government guarantee helped large ADIs to reduce their funding costs relatively more than for smaller ADIs. Furthermore, large ADIs continued to benefit from the WGS beyond the official removal of the government guarantee due to market perceptions of continued implicit government support for the too-big-to-fail banks. We also find that the guarantee encouraged large banks to shift their loan portfolios into housing loans thereby reducing their riskiness. Further tests using guaranteed and non-guaranteed bonds issued by ADIs show that the largest banks experienced a net reduction of 6.2 bps from adopting the government guarantee.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/141126