The Design of Government Guarantees for Bank Bonds : Lessons from the Recent Financial Crisis In 2010 authorities have taken the first steps to end some of the public support measures put in place in response to the financial crisis starting with government guarantees for bond issues. Financial institutions have made extensive use of this tool which has been effective in avoiding a further tightening of funding conditions but this type of public support has nonetheless raised some concerns. First the cost of issuing guaranteed bonds has mainly reflected the characteristics of the sovereign guarantor rather than those of the issuer thus favouring “weak” borrowers with a “strong” sovereign backing. This situation has the potential to distort competition and create incentives for excessive risk taking. Such effects could have been reduced by the choice of a different fee determination mechanism. Second the continued availability in 2010 of guarantee schemes despite a declining overall usage may be alleviating the pressure on some weak financial institutions to address their weaknesses: the average creditworthiness of banks issuing after mid 2009 when market conditions became more favourable has sharply declined. JEL Classification: G01 G12 G21 G28. Keywords: financial crisis policy response to the crisis government guaranteed bonds competitive distortions