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Does banks size distort market prices? Evidence for too-big-to-fail in the CDS market

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  • Völz, Manja
  • Wedow, Michael

Abstract

This 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 Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2009,06.

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Date of creation: 2009
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Handle: RePEc:zbw:bubdp2:200906

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Keywords: Market Discipline; Too Big To Fail; Too Big to Rescue CDS Spreads;

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References

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Citations

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Cited by:
  1. Keiler, Sebastian & Eder, Armin, 2013. "CDS spreads and systemic risk: A spatial econometric approach," Discussion Papers 01/2013, Deutsche Bundesbank, Research Centre.
  2. Xavier Freixas & Jean-Charles Rochet, 2012. "Taming SIFIs," Economics Working Papers 1328, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Günther, Susanne, 2013. "Eine ökonomische Analyse der Systemrelevanz von Banken," Arbeitspapiere 139, Westfälsche Wilhelms-Universität Münster (WWU), Institut für Genossenschaftswesen.
  4. Phil Molyneux & Klaus Schaeck & Tim Zhou, 2011. "‘Too Systemically Important to Fail’ in Banking," Working Papers 11011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

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