How much would banks be willing to pay to become "too-big-to-fail" and to capture other benefits?
AbstractThis paper examines an important aspect of the “too-big-to-fail” (TBTF) policy employed by regulatory agencies in the United States. How much is it worth to become TBTF? How much has the TBTF status added to bank shareholders’ wealth? Using market and accounting data during the merger boom (1991-2004) when larger banks greatly expanded their size through mergers and acquisitions, we find that banking organizations are willing to pay an added premium for mergers that will put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $14 billion in added premiums for the nine merger deals that brought the organizations over $100 billion in total assets. These added premiums may reflect that perceived benefits of being TBTF and/or other potential benefits associated with size.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 07-05.
Date of creation: 2007
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-08-18 (All new papers)
- NEP-BAN-2007-08-18 (Banking)
- NEP-COM-2007-08-18 (Industrial Competition)
- NEP-REG-2007-08-18 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carow, Kenneth A. & Kane, Edward J. & Narayanan, Rajesh P., 2006.
"How Have Borrowers Fared in Banking Megamergers?,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 38(3), pages 821-836, April.
- Kenneth A. Carow & Edward J. Kane & Rajesh P. Narayanan, 2005. "How have borrowers fared in banking mega-mergers?," Working Paper Series 2005-09, Federal Reserve Bank of San Francisco.
- Kenneth A. Carow & Edward J. Kane & Rajesh Narayanan, 2003. "How Have Borrowers Fared in Banking Mega-Mergers?," NBER Working Papers 10623, National Bureau of Economic Research, Inc.
- Brickley, James A. & James, Christopher M., 1986. "Access to deposit insurance, insolvency rules and the stock returns of financial institutions," Journal of Financial Economics, Elsevier, vol. 16(3), pages 345-371, July.
- 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.
- Edward J. Kane, 2000.
"Incentives for banking megamergers: what motives might regulators infer from event-study evidence?,"
Federal Reserve Bank of Cleveland, pages 671-705.
- Kane, Edward J, 2000. "Incentives for Banking Megamergers: What Motives Might Regulators Infer from Event-Study Evidence?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 671-701, August.
- Edward J. Kane, 2000. "Incentives for banking megamergers: what motives might regulations infer from event-study evidence?," Proceedings 675, Federal Reserve Bank of Chicago.
- Lazarus Angbazo & Anthony Saunders, . "The Effect of TBTF Deregulation on Bank Cost of Funds," Center for Financial Institutions Working Papers 97-25, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Houston, Joel F. & James, Christopher M. & Ryngaert, Michael D., 2001. "Where do merger gains come from? Bank mergers from the perspective of insiders and outsiders," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 285-331, May.
- 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.
- 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.
- 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.
- Donald P. Morgan & Kevin J. Stiroh, 2005. "Too big to fail after all these years," Staff Reports 220, Federal Reserve Bank of New York.
- Thomas M. Hoenig, 1999. "Financial industry megamergers and policy challenges," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 7-13.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
- Jens Hagendorff & Ignacio Hernando & Maria J. Nieto & Larry D. Wall, 2010.
"What do premiums paid for bank M&As reflect? the case of the European Union,"
2010-05, Federal Reserve Bank of Atlanta.
- Hagendorff, Jens & Hernando, Ignacio & Nieto, Maria J. & Wall, Larry D., 2012. "What do premiums paid for bank M&As reflect? The case of the European Union," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 749-759.
- Jens Hagendorff & Ignacio Hernando & María J. Nieto & Larry D. Wall, 2010. "What do premiums paid for bank M&As reflect? The case of the European Union," Banco de Espaï¿½a Working Papers 1011, Banco de Espa�a.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lu Dayrit).
If references are entirely missing, you can add them using this form.