Research conducted by Somnath Chatterjee, published on July 4, 2025, examines the impact of implicit government guarantees on six major Indian banks. The study estimates the default risk that is implicitly covered by the government.
Chatterjee's paper compares two measures of default risk for these banks. The first measure is based on bank equity prices, assuming no government bailout benefits for equity holders. The second measure uses Credit Default Swap (CDS) spreads, which only pay out if a bank defaults on its debt. CDS-derived default risk captures both the possibility of bank distress and the likelihood that the government will not bail out creditors. Typically, this risk is lower than that derived from equity prices.
The difference between these two measures quantifies the implicit subsidy provided to Indian banks. Although these subsidies have decreased since the global financial crisis and the Covid-19 pandemic shock, they are still significant.
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