Menu Expand

The Value of a Joint Liability Scheme: Estimating Group Support for German Landesbanken

Cite JOURNAL ARTICLE

Style

Käfer, B. The Value of a Joint Liability Scheme: Estimating Group Support for German Landesbanken. Applied Economics Quarterly, 62(3), 231-265. https://doi.org/10.3790/aeq.62.3.231
Käfer, Benjamin "The Value of a Joint Liability Scheme: Estimating Group Support for German Landesbanken" Applied Economics Quarterly 62.3, , 231-265. https://doi.org/10.3790/aeq.62.3.231
Käfer, Benjamin: The Value of a Joint Liability Scheme: Estimating Group Support for German Landesbanken, in: Applied Economics Quarterly, vol. 62, iss. 3, 231-265, [online] https://doi.org/10.3790/aeq.62.3.231

Format

The Value of a Joint Liability Scheme: Estimating Group Support for German Landesbanken

Käfer, Benjamin

Applied Economics Quarterly, Vol. 62 (2016), Iss. 3 : pp. 231–265

Additional Information

Article Details

Pricing

Author Details

University of Kassel, Department of Economics, Nora-Platiel-Str. 4, 34127 Kassel, Germany

Abstract

This paper estimates the funding advantage afforded by the joint liability scheme to German Landesbanken. The advantage is estimated by computing the difference between Moody’s baseline credit assessment (BCA), representing the stand-alone rating, and the adjusted BCA incorporating group support assumptions. This notch advantage is then multiplied by the average time-varying yield spreads between the respective notches and the rating-dependent liabilities. Our methodology estimates the funding advantage that remains when governmental support for banks formerly considered ‘Too Big to Fail’ (TBTF) is substantially reduced or even abolished. We find a substantial monetary funding advantage due to group support assumptions, amounting on average to a multiple of the Landesbanken’s aggregated annual profits. The aggregated observations mask a distinct heterogeneity, with some of the banks being significantly more exposed to the funding advantage than others.

JEL Classification: G12, G21, G24