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High values of implicit guarantees for bank debt can be taken as signalling the market's expectation that public authorities will rescue the institution in question in times of severe financial distress. By the same token, declines in the measure would suggest a drop in the perceived likelihood of such a bailout, perhaps reflecting the availability of more effective failure resolution tools (although they could also reflect other factors such an improvement in the asset quality of banks). The observed decline in the value of implicit guarantees over the past few years is at least consistent with the view that current efforts to establish more effective resolution regimes have been credible. The difficulty with this interpretation is that, as shown in previous CMF work, observed declines in the value of implicit guarantees tend primarily to reflect declining credit strength of the sovereign. The present report suggests, however, that the recently observed reduction in the value of implicit guarantees is in some cases beyond what would be expected on the basis of declining credit strength of the sovereign alone. Rather, part of the drop in value reflects the effects of changes in resolution regimes and related practices. In particular, holders of unsecured bank debt in some countries have actually incurred losses, although these events have tended to be rare and have occurred typically in the context of the failures of rather small banks. And where such losses occurred, however, there is clear evidence of a decline in implicit bank debt guarantees, especially but not exclusively in the case of smaller banks. In fact, in countries where legal changes were made to establish more effective resolution regimes and where, subsequently, actual failure resolutions involved losses of the part of at least some holders of unsecured bank debt, noticeable declines in the value of implicit guarantees were observed. Such cases remain isolated, however, among other things because there is the perception that no first-mover advantage exists from being tougher on creditors than other jurisdictions. Such course of action would put domestic banks at a finding disadvantage compared to international peers from jurisdictions where no such stance was adopted. This situation puts a premium on internationally co-ordinated efforts to reign in implicit guarantees, including those pursued within the European Union to develop an effective cross-border bank failure resolution framework. [ABSTRACT FROM AUTHOR]

The global financial crisis and the policy response to it have placed a sharp spotlight on the issue of implicit guarantees for bank debt This report discusses the incidence of implicit government guarantees for bank debt, their determinants, and estimates of their value. It shows i) that the extent of implicit guarantees differs from one banking sector to another and, within a given banking sector, from one bank to another, ii) that implicit guarantees are higher the lower the bank's stand-alone credit worthiness, the higher the credit worthiness of its sovereign and the relatively bigger the bank in its domestic context, iii) that the incidence of implicit guarantees increased since the beginning of the financial crisis, but has decreased more recently, iv) that this recent decrease can be explained to a large extent by declining sovereign strength and hence a reduced capacity of on the part of many sovereigns to provide for such guarantees, but is also consistent with ongoing efforts in many OECD countries to make bank failure resolution regimes and practices more effective, and v) that implicit guarantees persist. Implicit guarantees imply an undesirably close link between the value of bank and sovereign debt. They also imply significant funding cost advantages for the banks that benefit from them, thus implying competitive distortions and an invitation to beneficiary banks to use them and, perhaps, take on too much risk. [ABSTRACT FROM AUTHOR]