The Bank of England published Staff Working Paper No. 1,136, which develops a market-based estimate of the implicit subsidy provided by an expected government backstop for major Indian banks by comparing default-risk measures derived from equity prices and Credit Default Swap (CDS) spreads. The paper finds that implied subsidies have fallen from peaks seen during the global financial crisis and the Covid-19 shock but remain non-trivial. The analysis covers six large Indian banks (Axis Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Bank of Baroda and State Bank of India) over 2005.1 to 2024.12. Expected losses are first estimated from equity prices using a contingent claims framework with a jump-diffusion structural credit-risk model, under an assumption that equity holders are not benefiting from a bailout. These are then compared with expected losses derived from five-year CDS spreads, which should reflect the joint risk of bank distress and the government not bailing out creditors. The difference is used to quantify the implicit subsidy: the nominal subsidy is estimated to have peaked at INR 4.75 tn (GBP 60 bn) in October 2008 (around 2,000 basis points relative to roughly INR 22 tn of debt), and to have fallen to around 600 basis points by end-2024 (INR 9 tn (GBP 82 bn) against INR 155 tn (GBP 1.4 tn) of debt). The results also indicate that subsidies peak in crises and that, while public sector banks tend to show higher subsidies in tranquil periods, private sector banks’ implied subsidies exceeded those of public sector banks during crisis periods. As a staff working paper, the publication is intended to elicit comments and debate and does not represent Bank of England policy.
Bank of England 2025-07-04
Bank of England working paper estimates implicit government guarantee for Indian banks declined from around 2,000 basis points in 2008 to about 600 basis points by end-2024
The Bank of England's Staff Working Paper No. 1,136 estimates the implicit subsidy from expected government backstops for major Indian banks by comparing default-risk measures from equity prices and Credit Default Swap spreads. The study finds that while implied subsidies have decreased since the global financial crisis and Covid-19 shock, they remain significant, with private sector banks showing higher subsidies than public sector banks during crises. The paper aims to stimulate discussion and does not reflect official Bank of England policy.