Governments provide bank guarantees, such as deposit insurance. While risk effects are well researched, impacts on bank output remain largely unexplored. We investigate bank output effects using data from 75 countries/regions on bank liquidity creation, a comprehensive bank output measure. We address reverse causality, examining home-country guarantee effects on liquidity creation by subsidiary banks in foreign host nations, and mitigate omitted-variables concerns with host country × year fixed effects and home country controls. Findings suggest home-country guarantees decrease subsidiary bank liquidity creation up to 10%, and hold prior to, during, and after the Global Financial Crisis.

We examine how option compensation affects banks' risky mortgage origination and sale decisions before the financial crisis in 2008. We find that, in the period immediately before the financial crisis, option compensation has little impact on the riskiness of mortgages originated and is negatively associated with mortgage lenders' propensity to sell risky mortgages. The results are consistent with banks' incentives to maximize revenues from origination and servicing fees while managing risk exposure by adjusting the sale of risky mortgages. For identification, we use bank-year fixed effects and matched loan applications to control for both supply- and demand-side factors of mortgage lending. We find similar results when using the variation in option compensation generated by the implementation of FAS 123R.