How much did banks pay to become too-big-to-fail and to become systematically important?
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 $15 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 TBTF merger deals. Their estimated TBTF subsidy is large enough to create serious concern, particularly since the recently assisted mergers have effectively allowed for TBTF banking organizations to become even bigger and for nonbanks to become part of TBTF banking organizations, thus extending the TBTF subsidy beyond banking.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: 10 Independence Mall, Philadelphia, PA 19106-1574|
Web page: http://www.philadelphiafed.org/
More information through EDIRC
|Order Information:|| Web: http://www.phil.frb.org/econ/wps/index.html Email: |
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.:
- 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.
- 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.
- 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;Western Finance Association, vol. 36(2), pages 161-168, December.
- Edward J. Kane, 2000.
"Incentives for banking megamergers: what motives might regulations infer from event-study evidence?,"
675, Federal Reserve Bank of Chicago.
- Edward J. Kane, 2000. "Incentives for banking megamergers: what motives might regulators infer from event-study evidence?," Proceedings, Federal Reserve Bank of Cleveland, pages 671-705.
- Kane, Edward J, 2000. "Incentives for Banking Megamergers: What Motives Might Regulators Infer from Event-Study Evidence?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 671-701, August.
- Penas, Maria Fabiana & Unal, Haluk, 2004. "Gains in bank mergers: Evidence from the bond markets," Journal of Financial Economics, Elsevier, vol. 74(1), pages 149-179, October.
- Acharya, Viral V. & Yorulmazer, Tanju, 2007.
"Too many to fail--An analysis of time-inconsistency in bank closure policies,"
Journal of Financial Intermediation,
Elsevier, vol. 16(1), pages 1-31, January.
- Acharya, Viral V & Yorulmazer, Tanju, 2004. "Too Many to Fail - An Analysis of Time Inconsistency in Bank Closure Policies," CEPR Discussion Papers 4778, C.E.P.R. Discussion Papers.
- Viral Acharya & Tanju Yorulmazer, 2007. "Too many to fail - an analysis of time-inconsistency in bank closure policies," Bank of England working papers 319, Bank of England.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
- 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;Western Finance Association, vol. 36(2), pages 87-110, December.
- 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.
- Flannery, Mark J & Sorescu, Sorin M, 1996. " Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983-1991," Journal of Finance, American Finance Association, vol. 51(4), pages 1347-77, September.
- 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, vol. 16(3), pages 345-371, July.
- Carow, Kenneth A. & Kane, Edward J. & Narayanan, Rajesh P., 2006.
"How Have Borrowers Fared in Banking Megamergers?,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 38(3), pages 821-836, April.
- Kenneth A. Carow & Edward J. Kane & Rajesh Narayanan, 2003. "How Have Borrowers Fared in Banking Mega-Mergers?," NBER Working Papers 10623, National Bureau of Economic Research, Inc.
- Kenneth A. Carow & Edward J. Kane & Rajesh P. Narayanan, 2005. "How have borrowers fared in banking mega-mergers?," Working Paper Series 2005-09, Federal Reserve Bank of San Francisco.
- Houston, Joel F. & Ryngaert, Michael D., 1994. "The overall gains from large bank mergers," Journal of Banking & Finance, Elsevier, vol. 18(6), pages 1155-1176, December.
- 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, vol. 27(3), pages 777-88, August.
- 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, issue Spr, pages 21-44.
- 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, vol. 45(5), pages 1587-1600, December.
- Ingo Walter & Markus M. Schmid, 2006.
"Do Financial Conglomerates Create or Destroy Economic Value?,"
06-28, New York University, Leonard N. Stern School of Business, Department of Economics.
- Schmid, Markus M. & Walter, Ingo, 2009. "Do financial conglomerates create or destroy economic value?," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 193-216, April.
- 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.
When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:11-37. 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 references are entirely missing, you can add them using this form.