Advanced Search
MyIDEAS: Login to save this paper or follow this series

How much did banks pay to become too-big-to-fail and to become systemically important?

Contents:

Author Info

  • 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.

Download Info

If 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.
File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2009/wp09-34.pdf
Download Restriction: no

Bibliographic Info

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

as in new window
Length:
Date of creation: 2009
Date of revision:
Handle: RePEc:fip:fedpwp:09-34

Contact details of provider:
Postal: 10 Independence Mall, Philadelphia, PA 19106-1574
Web page: http://www.philadelphiafed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.phil.frb.org/econ/wps/index.html

Related research

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

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Ingo Walter & Markus M. Schmid, 2006. "Do Financial Conglomerates Create or Destroy Economic Value?," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 06-28, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Edward Kane, 2009. "Extracting Nontransparent Safety Net Subsidies by Strategically Expanding and Contracting a Financial Institution’s Accounting Balance Sheet," Journal of Financial Services Research, Springer, Springer, vol. 36(2), pages 161-168, December.
  3. Houston, Joel F. & Ryngaert, Michael D., 1994. "The overall gains from large bank mergers," Journal of Banking & Finance, Elsevier, Elsevier, vol. 18(6), pages 1155-1176, December.
  4. Penas, Maria Fabiana & Unal, Haluk, 2004. "Gains in bank mergers: Evidence from the bond markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(1), pages 149-179, October.
  5. Edward J. Kane, 2000. "Incentives for banking megamergers: what motives might regulations infer from event-study evidence?," Proceedings, Federal Reserve Bank of Chicago 675, Federal Reserve Bank of Chicago.
  6. 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, Blackwell Publishing, vol. 27(3), pages 777-88, August.
  7. 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, Society for Financial Studies, vol. 24(4), pages 1378-1405.
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
  9. 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, Elsevier, vol. 21(1), pages 3-40, May.
  10. Kenneth A. Carow & Edward J. Kane & Rajesh P. Narayanan, 2005. "How have borrowers fared in banking mega-mergers?," Working Paper Series, Federal Reserve Bank of San Francisco 2005-09, Federal Reserve Bank of San Francisco.
  11. 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, Springer, vol. 36(2), pages 87-110, December.
  12. O'Hara, Maureen & Shaw, Wayne, 1990. " Deposit Insurance and Wealth Effects: The Value of Being "Too Big to Fail."," Journal of Finance, American Finance Association, American Finance Association, vol. 45(5), pages 1587-1600, December.
  13. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 16(1), pages 1-31, January.
  14. George G. Kaufman, 1991. "Capital in banking: past, present and future," Working Paper Series, Issues in Financial Regulation, Federal Reserve Bank of Chicago 91-10, Federal Reserve Bank of Chicago.
  15. 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, Oxford University Press, vol. 20(1), pages 60-101, April.
  16. Flannery, Mark J & Sorescu, Sorin M, 1996. " Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983-1991," Journal of Finance, American Finance Association, American Finance Association, vol. 51(4), pages 1347-77, September.
  17. 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, Elsevier, vol. 16(3), pages 345-371, July.
  18. 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, Federal Reserve Bank of Richmond, issue Spr, pages 21-44.
Full references (including those not matched with items on IDEAS)

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
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Joseph P. Hughes & Loretta J. Mester, 2011. "Who said large banks don't experience scale economies? Evidence from a risk-return-driven cost function," Working Papers, Federal Reserve Bank of Philadelphia 11-27, Federal Reserve Bank of Philadelphia.
  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, Central Bank of Brazil, Research Department 233, Central Bank of Brazil, Research Department.
  3. Montgomery, Heather & Takahashi, Yuki, 2011. "The Japanese Big Bang: the effects of "free, fair and global"," MPRA Paper 35040, University Library of Munich, Germany.
  4. Philip E. Strahan, 2013. "Too Big to Fail: Causes, Consequences, and Policy Responses," Annual Review of Financial Economics, Annual Reviews, Annual Reviews, vol. 5(1), pages 43-61, November.
  5. Kersten Kellermann, 2011. "Too big to fail: a thorn in the side of free markets," Empirica, Springer, Springer, vol. 38(3), pages 331-349, July.
  6. Tigran Poghosyan & Charlotte Werger & Jakob de Haan, 2014. "Size and support ratings of US banks," DNB Working Papers, Netherlands Central Bank, Research Department 434, Netherlands Central Bank, Research Department.
  7. Jokivuolle, Esa & Keppo, Jussi, 2014. "Bankers' compensation: Sprint swimming in short bonus pools?," Research Discussion Papers, Bank of Finland 2/2014, Bank of Finland.
  8. Mark Mink & Jakob de Haan, 2014. "Spillovers from Systemic Bank Defaults," CESifo Working Paper Series, CESifo Group Munich 4792, CESifo Group Munich.
  9. Hakenes , Hendrik & Hasan, Iftekhar & Molyneux, Phil & Xie , Ru, 2014. "Small banks and local economic development," Research Discussion Papers, Bank of Finland 5/2014, Bank of Finland.
  10. 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, Central Bank of Brazil, Research Department 244, Central Bank of Brazil, Research Department.
  11. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(3), pages 569-596.
  12. 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, Elsevier, vol. 37(12), pages 5147-5158.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:09-34. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Beth Paul).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.