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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, III
  • 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, the authors 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. They estimate at least $14 billion in added premiums for the eight merger deals that brought the organizations to over $100 billion in assets. In addition, the authors find that both the stock and bond markets reacted positively to these deals. Their estimated TBTF subsidy is large enough to create serious concern, since recent assisted mergers have allowed TBTF organizations to become even bigger and for nonbanks to become part of TBTF banking organizations, thus extending the TBTF subsidy beyond banking.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 09-34.

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Date of creation: 2009
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Handle: RePEc:fip:fedpwp:09-34

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Keywords: Bank failures ; Bank size ; Bank mergers ; Systemic risk;

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  1. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May.
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  14. George G. Kaufman, 1991. "Capital in banking: past, present and future," Working Paper Series, Issues in Financial Regulation 91-10, Federal Reserve Bank of Chicago.
  15. 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.
  16. Julie Wulf, 2004. "Do CEOs in Mergers Trade Power for Premium? Evidence from "Mergers of Equals"," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 60-101, April.
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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. Philip E. Strahan, 2013. "Too Big to Fail: Causes, Consequences, and Policy Responses," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 43-61, November.
  2. 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.
  3. Joseph P. Hughes & Loretta J. Mester, 2013. "Who said large banks don’t experience scale economies? Evidence from a risk-return-driven cost function," Working Papers 13-13, Federal Reserve Bank of Philadelphia, revised 04 Feb 2014.
  4. Hakenes , Hendrik & Hasan, Iftekhar & Molyneux, Phil & Xie , Ru, 2014. "Small banks and local economic development," Research Discussion Papers 5/2014, Bank of Finland.
  5. Montgomery, Heather & Takahashi, Yuki, 2011. "The Japanese Big Bang: the effects of "free, fair and global"," MPRA Paper 35040, University Library of Munich, Germany.
  6. Kersten Kellermann, 2011. "Too big to fail: a thorn in the side of free markets," Empirica, Springer, vol. 38(3), pages 331-349, July.
  7. Mark Mink & Jakob de Haan, 2014. "Spillovers from Systemic Bank Defaults," CESifo Working Paper Series 4792, CESifo Group Munich.
  8. 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.
  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. Jokivuolle, Esa & Keppo, Jussi, 2014. "Bankers' compensation: Sprint swimming in short bonus pools?," Research Discussion Papers 2/2014, Bank of Finland.
  11. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 569-596.

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