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Quantifying Structural Subsidy Values for Systemically Important Financial Institutions

  • Kenichi Ueda
  • Beatrice Weder di Mauro

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/128.

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Length: 28
Date of creation: 01 May 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/128
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  1. Doluca, Hasan & Klüh, Ulrich & Wagner, Marco & Weder di Mauro, Beatrice, 2010. "Reducing systemic relevance: A proposal," Working Papers 04/2010, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
  2. 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.
  3. Donald P. Morgan & Kevin J. Stiroh, 2005. "Too big to fail after all these years," Staff Reports 220, Federal Reserve Bank of New York.
  4. 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.
  5. Narayana Kocherlakota, 2010. "Taxing risk and the optimal regulation of financial institutions," Economic Policy Paper 10-3, Federal Reserve Bank of Minneapolis.
  6. Reint Gropp & Hendrik Hakenes & Isabel Schnabel, 2010. "Competition, Risk-Shifting, and Public Bail-out Policies," Working Papers 1003, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 14 Jan 2010.
  7. 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.
  8. 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).
  9. Kaplan-Appio, Idanna, 2002. "Estimating the Value of Implicit Government Guarantees to Thai Banks," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 26-35, February.
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