Does banks size distort market prices? Evidence for too-big-to-fail in the CDS market
AbstractThis paper examines the potential distortion of prices in the CDS market caused by too-big-to-fail. Overall, we find evidence for market discipline in the CDS market. However, CDS prices are distorted due to a size effect which arises when investors expect a public bail-out as a result of too-big-to-fail. A one percentage point increase in size reduces the CDS spread of a bank by about two basis points. We further find that some banks have already reached a size that makes them too-big-to-be-rescued. While the price distortion for these banks decreases the existence of banks that are considered to be toobig-to-rescue raises important new issues for banking supervisors. --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2009,06.
Date of creation: 2009
Date of revision:
Market Discipline; Too Big To Fail; Too Big to Rescue CDS Spreads;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-05 (All new papers)
- NEP-BAN-2009-09-05 (Banking)
- NEP-REG-2009-09-05 (Regulation)
- NEP-RMG-2009-09-05 (Risk Management)
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