When Government Guarantees Are Risky In a recent paper by (Makinen et al. 2019), we develop a simple framework to describe the risk-return trade-off that government guarantees can generate in bank asset returns. In our setting, government guarantees are risky in the sense that they provide protection that depends on the aggregate state of the economy. In recessions, governments are arguably more willing to rescue banks; however, weaker public finances may constrain their ability to support them. If the implicit support offers higher protection in good than in bad states of the world, it can make the payoffs of debt and equity claims more positively correlated with the aggregate state of the economy. As a consequence, bank asset risk premia would increase, dampening the reduction in bank funding costs and thus attenuating the beneficial effects of bank guarantees. This simple theory also predicts that such effects should be more prominent for banks that are guaranteed by riskier sovereigns.
The Zoom Boom Few entrepreneurs profited in 2020 quite like Eric Yuan, founder and CEO of Zoom. But having poured his life's work into the video conferencing platform, Yuan's success had been a long time coming