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Quantifying Structural Subsidy Values for Systemically Important Financial Institutions

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  • Kenichi Ueda
  • Beatrice Weder di Mauro

Abstract

Claimants to SIFIs receive transfers when governments are forced into bailouts. Ex ante, the bailout expectation lowers daily funding costs. This funding cost differential reflects both the structural level of the government support and the time-varying market valuation for such a support. With large worldwide sample of banks, we estimate the structural subsidy values by exploiting expectations of state support embedded in credit ratings and by using long-run average value of rating bonus. It was already sizable, 60 basis points, as of the end-2007, before the crisis. It increased to 80 basis points by the end-2009.

Suggested Citation

  • Kenichi Ueda & Beatrice Weder di Mauro, 2012. "Quantifying Structural Subsidy Values for Systemically Important Financial Institutions," IMF Working Papers 12/128, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/128
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    References listed on IDEAS

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    1. Andrea Resti & Andrea Sironi, 2005. "The Basel Committee Approach To Risk-Weights And External Ratings: What Do We Learn From Bond Spreads?," Temi di discussione (Economic working papers) 548, Bank of Italy, Economic Research and International Relations Area.
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    4. Reint Gropp & Hendrik Hakenes & Isabel Schnabel, 2011. "Competition, Risk-shifting, and Public Bail-out Policies," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2084-2120.
    5. Dean Baker & Travis McArthur, 2009. "The Value of the “Too Big to Fail” Big Bank Subsidy," CEPR Reports and Issue Briefs 2009-36, Center for Economic and Policy Research (CEPR).
    6. International Monetary Fund, 2010. "United States; Publication of Financial Sector Assessment Program Documentation: Technical Note on Stress Testing," IMF Staff Country Reports 10/244, International Monetary Fund.
    7. Narayana R. Kocherlakota, 2010. "Taxing risk and the optimal regulation of financial institutions," Economic Policy Paper 10-3, Federal Reserve Bank of Minneapolis.
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    More about this item

    Keywords

    Systemically important financial institutions; bank funding subsidy; bank bailout; probability; financial institutions; samples; financial stability; financial sector; Financial Institutions and Services: Government Policy and Regulation; Structure; Scope; and Performance of Government;

    JEL classification:

    • 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
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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