Public Guarantees on Bank Bonds
In 2008 the markets were better than they are today. There are a few reasons that this could be. One of those things would be guaranteed bank bonds. Most people were in favor of this and it did seem to help.
In October 2008 the government adopted some measures to support banks. These measures gave guarantees on new debt, covered capital injections, and asset purchases/asset guarantees. The measures that were taken had two main objectives. The first one is to support the funding in order to avoid any liquidity crisis and bankruptcies. The second objective is to support lending in order to reduce the likelihood of a credit crunch.
All in all it seems that the smooth functioning of the financial system is definitely aided by these guarantees. The question is, can we use these guarantees again? They seemed to help the financial systems before, so wouldn’t it work again? If we do use them again under what conditions will we use them?
Some feel that these guarantees may distract banks’ strategies. They may also create excessive risk taking with credit quality of the issuers becoming worse over time. These issues declined for banks with high ratings and increased for banks with low ratings.
Bond guarantees have proven to be an effective policy tool. The issuance was likely to contribute to lower funding costs, sizable, and to prevent a credit crunch. Guaranteed bank bonds have also contributed to avoiding worse case scenarios which have helped to reduce the likelihood of bankruptcies being wide spread.
Before we can use these guaranteed bank bonds can be used again there are two issues that we must address. The first one is that there are differences in values of guarantees, which causes distortions. The second is that there are weaknesses in domestic sovereign. Both of these must be addressed before we use them again.
There are implications of cost distortions. The major implication is that there is an absence of a level playing field which can harm competition. This can lead to miscalculations of resources which can lower banking system productivity.
There are many reasons why it would be a good idea to start using guaranteed bank bonds again. If we do use them there are some things that must be considered and dealt with. Only time will tell if we will use these bonds again. Most people feel that it would be a good idea to address any and all concerns and start using them again. Other people are a little more skeptical about whether or not we should. Using these guaranteed bank bonds would be the best way to tell if they will be good for the financial system again or not.