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How much would banks be willing to pay to become \"too-big-to-fail\" and to capture other benefits?

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  • Elijah Brewer
  • Julapa Jagtiani

Abstract

This 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.

Suggested Citation

  • Elijah Brewer & Julapa Jagtiani, 2007. "How much would banks be willing to pay to become \"too-big-to-fail\" and to capture other benefits?," Research Working Paper RWP 07-05, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp07-05
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    Cited by:

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    2. 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.
    3. Peter Fiechter & Wayne R. Landsman & Kenneth Peasnell & Annelies Renders, 2017. "The IFRS option to reclassify financial assets out of fair value in 2008: the roles played by regulatory capital and too-important-to-fail status," Review of Accounting Studies, Springer, vol. 22(4), pages 1698-1731, December.
    4. Jens Hagendorff & Maria J. Nieto & Larry D. Wall, 2012. "The safety and soundness effects of bank M&A in the EU," FRB Atlanta Working Paper 2012-13, Federal Reserve Bank of Atlanta.
    5. Jens Hagendorff & Maria J. Nieto, 2015. "The Safety and Soundness Effects of Bank M&A in the EU: Does Prudential Regulation Have any Impact?," European Financial Management, European Financial Management Association, vol. 21(3), pages 462-490, June.
    6. Mark Anthony Johnson & Abdullah Mamun, 2012. "The failure of Lehman Brothers and its impact on other financial institutions," Applied Financial Economics, Taylor & Francis Journals, vol. 22(5), pages 375-385, March.
    7. Ning Gong & Kenneth D. Jones, 2013. "Bailouts, Monitoring, and Penalties: An Integrated Framework of Government Policies to Manage the Too-Big-to-Fail Problem," International Review of Finance, International Review of Finance Ltd., vol. 13(3), pages 299-325, September.
    8. Elijah Brewer & Ann Marie Klingenhagen, 2010. "Be careful what you wish for: the stock market reactions to bailing out large financial institutions," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 18(1), pages 56-69, February.
    9. Edward Kane, 2018. "Double Whammy: Implicit Subsidies and the Great Financial Crisis," Working Papers Series 81, Institute for New Economic Thinking.
    10. 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).
    11. Acharya, Viral & Anginer, Deniz & Warburton, Joe, 2016. "The End of Market Discipline? Investor Expectations of Implicit Government Guarantees," MPRA Paper 79700, University Library of Munich, Germany.
    12. Priyank Gandhi & Hanno Lustig, 2010. "Size Anomalies in U.S. Bank Stock Returns: A Fiscal Explanation," NBER Working Papers 16553, National Bureau of Economic Research, Inc.
    13. Bleuel, Hans-H., 2009. "The German banking system and the global financial crisis: causes, developments and policy responses," Duesseldorf Working Papers in Applied Management and Economics 08, Duesseldorf University of Applied Sciences.
    14. John S. Howe & Thibaut G. Morillon, 2017. "Do Mergers and Acquisitions Affect Information Asymmetry in the Banking Sector?," NFI Working Papers 2017-WP-01, Indiana State University, Scott College of Business, Networks Financial Institute.
    15. Molyneux, Philip & Schaeck, Klaus & Zhou, Tim Mi, 2014. "‘Too systemically important to fail’ in banking – Evidence from bank mergers and acquisitions," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 258-282.

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