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How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important?

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  • Elijah Brewer

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  • Julapa Jagtiani

    ()

Abstract

This paper estimates the value of the too-big-to-fail (TBTF) subsidy. Using data from the merger boom of 1991–2004, we find that banking organizations were willing to pay an added premium for mergers that would put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $15 billion in added premiums for the eight merger deals that brought the organizations to over $100 billion in assets. In addition, we find that both the stock and bond markets reacted positively to these TBTF merger deals. Our estimated TBTF subsidy is large enough to create serious concern, particularly since the recently assisted mergers have effectively allowed for TBTF banking organizations to become even bigger and for nonbanks to become part of TBTF banking organizations, thus extending the TBTF subsidy beyond banking. Copyright Springer Science+Business Media, LLC 2013

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File URL: http://hdl.handle.net/10.1007/s10693-011-0119-6
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Bibliographic Info

Article provided by Springer in its journal Journal of Financial Services Research.

Volume (Year): 43 (2013)
Issue (Month): 1 (February)
Pages: 1-35

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Handle: RePEc:kap:jfsres:v:43:y:2013:i:1:p:1-35

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Web page: http://www.springerlink.com/link.asp?id=102934

Related research

Keywords: Bank merger; Too-big-to-fail; TBTF subsidy; Systemically important bank; G21; G28; G34;

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References

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  1. Ingo Walter & Markus M. Schmid, 2006. "Do Financial Conglomerates Create or Destroy Economic Value?," Working Papers 06-28, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Huberto M. Ennis & H.S. Malek, 2005. "Bank risk of failure and the too-big-to-fail policy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 21-44.
  3. Acharya, Viral V & Yorulmazer, Tanju, 2004. "Too Many to Fail - An Analysis of Time Inconsistency in Bank Closure Policies," CEPR Discussion Papers 4778, C.E.P.R. Discussion Papers.
  4. Craig O. Brown & I. Serdar Dinç, 0. "Too Many to Fail? Evidence of Regulatory Forbearance When the Banking Sector Is Weak," Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1378-1405.
  5. Benston, George J & Hunter, William C & Wall, Larry D, 1995. "Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Earnings Diversification," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 777-88, August.
  6. Robert DeYoung & Douglas Evanoff & Philip Molyneux, 2009. "Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature," Journal of Financial Services Research, Springer, vol. 36(2), pages 87-110, December.
  7. Penas, Maria Fabiana & Unal, Haluk, 2004. "Gains in bank mergers: Evidence from the bond markets," Journal of Financial Economics, Elsevier, vol. 74(1), pages 149-179, October.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The economics of enormity
    by ? in Free exchange on 2012-11-03 14:44:50
  2. We Must 'Stand Up to Concentrated and Powerful Corporate Interests'
    by ? in Economist's View on 2012-11-08 18:41:53
  3. 10 Tuesday PM Reads
    by Barry Ritholtz in The Big Picture on 2012-11-13 21:00:42
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Cited by:
  1. Hakenes , Hendrik & Hasan, Iftekhar & Molyneux, Phil & Xie , Ru, 2014. "Small banks and local economic development," Research Discussion Papers 5/2014, Bank of Finland.
  2. Hughes, Joseph P. & Mester, Loretta J., 2013. "Who said large banks don’t experience scale economies? Evidence from a risk-return-driven cost function," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 559-585.
  3. Benjamin M. Tabak & Dimas M. Fazio & Daniel O. Cajueiro, 2011. "Profit, Cost and Scale Efficiency for Latin American Banks: Concentration-Performance Relationship," Working Papers Series 244, Central Bank of Brazil, Research Department.
  4. Joseph J. Hughes & Loretta Mester, 2011. "Who Said Large Banks Don't Experience Scale Economies? Evidence from a Risk-Return-Driven Cost Function," Departmental Working Papers 201127, Rutgers University, Department of Economics.
  5. Jokivuolle, Esa & Keppo, Jussi, 2014. "Bankers' compensation: Sprint swimming in short bonus pools?," Research Discussion Papers 2/2014, Bank of Finland.
  6. Ýlker Arslan, 2010. "Does Size of Banks Really Matter? Evidence from CDS Market Data," Working Papers 1008, Izmir University of Economics.
  7. Raquel de F. Oliveira & Rafael F. Schiozer & Lucas A. B. de C. Barros, 2011. "Too Big to Fail Perception by Depositors: an empirical investigation," Working Papers Series 233, Central Bank of Brazil, Research Department.
  8. Kersten Kellermann, 2011. "Too big to fail: a thorn in the side of free markets," Empirica, Springer, vol. 38(3), pages 331-349, July.
  9. Löffler, Gunter & Posch, Peter N, 2013. "Wall Street’s bailout bet: Market reactions to house price releases in the presence of bailout expectations," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5147-5158.
  10. Montgomery, Heather & Takahashi, Yuki, 2011. "The Japanese Big Bang: the effects of "free, fair and global"," MPRA Paper 35040, University Library of Munich, Germany.

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