Believe me, it will be enough - Governmental guarantees and banks risk taking in the fair value portfolio

Mohrmann U, Muhn M, Nienhaus M, Riepe J

Abstract
On the 26th of July 2012, Mario Draghi, the president of the European CentralBank (ECB), announced the ECB's willingness to engage in a large scale capitalmarket intervention to foster the liquidity flow within the currency union, reducethe sovereign bond spreads of the most affected Euro countries, and preserve theEuro as a currency. On the following day, sovereign debt spreads in countries likeSpain and Italy decreased by 1/3 (Heinz and Sun, 2014). This reestablished confidencein the financial health and power of those countries' domestic institutions.Although the intervention mainly tackled the sovereign debt markets, it had farreachingconsequences for the banking industry. Because the value of any guaranteealways depends on the financial health of the guarantor (Martinez-Periaand Schmukler, 2001), Draghi's reassurance simultaneously represents one of thelargest shocks to explicit as well as implicit governmental guarantees for thebanking sector, with a distinct impact in crisis-prone countries.