IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2016-224.html
   My bibliography  Save this paper

Whose Credit Line is it Anyway; An Update on Banks' Implicit Subsidies

Author

Listed:
  • Tryggvi Gudmundsson

Abstract

The post-crisis financial sector framework reform remains incomplete. While capital and liquidity requirements have been strengthened, doubts remain over other aspects, including the fact that expectations of government support for systemically-important banks (SIBs) remain intact. In this paper, we use a jump diffusion option-pricing approach to provide estimates of implicit subsidies gained by these banks due to the expectation of protection to creditors provided by governments. While these subsidies have declined in the post-crisis era as volatility has declined and capital levels have increased, they remain non-trivial. Even conservative parameterizations of default and loss probabilities lead to macroeconomically significant figures.

Suggested Citation

  • Tryggvi Gudmundsson, 2016. "Whose Credit Line is it Anyway; An Update on Banks' Implicit Subsidies," IMF Working Papers 2016/224, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2016/224
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=44406
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Asli Demirguc-Kunt & Enrica Detragiache & Ouarda Merrouche, 2013. "Bank Capital: Lessons from the Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1147-1164, September.
    2. Serkan Arslanalp & Yin Liao, 2015. "Contingent Liabilities from Banks; How to Track Them?," IMF Working Papers 2015/255, International Monetary Fund.
    3. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
    4. Anat Admati & Martin Hellwig, 2013. "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," Economics Books, Princeton University Press, edition 1, number 9929.
    5. Bryan Kelly & Hanno Lustig & Stijn Van Nieuwerburgh, 2016. "Too-Systemic-to-Fail: What Option Markets Imply about Sector-Wide Government Guarantees," American Economic Review, American Economic Association, vol. 106(6), pages 1278-1319, June.
    6. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-347, May.
    7. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    8. Noss, Joseph & Sowerbutts, Rhiannon, 2012. "Financial Stability Paper No 15: The implicit subsidy of banks," Bank of England Financial Stability Papers 15, Bank of England.
    9. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    10. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
    11. Cummins, J David, 1988. " Risk-Based Premiums for Insurance Guaranty Funds," Journal of Finance, American Finance Association, vol. 43(4), pages 823-839, September.
    12. Martin Hellwig, 2010. "Capital Regulation after the Crisis: Business as Usual?," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 8(02), pages 40-46, July.
    13. Marcus, Alan J & Shaked, Israel, 1984. "The Valuation of FDIC Deposit Insurance Using Option-pricing Estimates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 446-460, November.
    14. Bridges, Jonathan & Gregory, David & Nielsen, Mette & Pezzini, Silvia & Radia, Amar & Spaltro, Marco, 2014. "The impact of capital requirements on bank lending," Bank of England working papers 486, Bank of England.
    15. Ronn, Ehud I & Verma, Avinash K, 1986. "Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, vol. 41(4), pages 871-895, September.
    16. Robert J. Barro, 2005. "Rare Events and the Equity Premium," NBER Working Papers 11310, National Bureau of Economic Research, Inc.
    17. Richard S. Grossman, 2010. "Unsettled Account: The Evolution of Banking in the Industrialized World since 1800," Economics Books, Princeton University Press, edition 1, number 9219.
    18. Martin Hellwig, 2010. "Capital Regulation after the Crisis: Business as Usual?," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 8(2), pages 40-46, 07.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Behn, Markus & Schramm, Alexander, 2020. "The impact of G-SIB identification on bank lending: evidence from syndicated loans," Working Paper Series 2479, European Central Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:ces:ifodic:v:11:y:2014:i:4:p:19105947 is not listed on IDEAS
    2. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    3. Mariathasan, Mike & Merrouche, Ouarda, 2014. "The manipulation of basel risk-weights," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 300-321.
    4. Andrew Kuritzkes & Til Schuermann & Scott Weiner, 2002. "Deposit Insurance and Risk Management of the U.S. Banking System: How Much? How Safe? Who Pays?," Center for Financial Institutions Working Papers 02-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
    5. Behn, Markus & Haselmann, Rainer & Vig, Vikrant, 2014. "The limits of model-based regulation," SAFE Working Paper Series 75, Leibniz Institute for Financial Research SAFE.
    6. Behn, Markus & Haselmann, Rainer & Vig, Vikrant, 2014. "Risk weights, lending, and financial stability: Limits to model-based capital regulation," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100430, Verein für Socialpolitik / German Economic Association.
    7. Florian Buck, 2014. "Financial Regulation and the Grabbing Hand," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(4), pages 03-13, 01.
    8. Florian Buck, 2014. "Financial Regulation and the Grabbing Hand," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(04), pages 03-13, January.
    9. Ernest Dautovic, 2019. "Has Regulatory Capital Made Banks Safer? Skin in the Game vs Moral Hazard," Cahiers de Recherches Economiques du Département d'économie 19.03, Université de Lausanne, Faculté des HEC, Département d’économie.
    10. Goodhart, Charles, 2013. "Ratio controls need reconsideration," Journal of Financial Stability, Elsevier, vol. 9(3), pages 445-450.
    11. Abbassi, Puriya & Iyer, Rajkamal & Peydró, José-Luis & Soto, Paul, 2020. "Stressed Banks? Evidence from the Largest-Ever Supervisory Review," EconStor Preprints 217048, ZBW - Leibniz Information Centre for Economics.
    12. Morrison, Alan D. & White, Lucy, 2013. "Reputational contagion and optimal regulatory forbearance," Journal of Financial Economics, Elsevier, vol. 110(3), pages 642-658.
    13. Marcus Miller & Lei Zhang, 2013. "The Invisible Hand And The Banking Trade: Seigniorage, Risk-Shifting, And More," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 56(3-4), pages 365-388.
    14. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    15. Giancarlo Corsetti & Michael P. Devereux & John Hassler & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2011. "Chapter 5: Taxation and Regulation of the Financial Sector," EEAG Report on the European Economy, CESifo, vol. 0, pages 147-169, February.
    16. Hakenes, Hendrik & Schnabel, Isabel, 2013. "Regulatory Capture by Sophistication," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79991, Verein für Socialpolitik / German Economic Association.
    17. Lo, Chien-Ling & Lee, Jin-Ping & Yu, Min-Teh, 2013. "Valuation of insurers’ contingent capital with counterparty risk and price endogeneity," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5025-5035.
    18. Jonathan Carroll & Shino Takayama, 2014. "A hierarchical agency model of deposit insurance," Annals of Finance, Springer, vol. 10(2), pages 267-290, May.
    19. Marianne Gizycki & Mark Levonian, 1993. "A Decade of Australian Banking Risk: Evidence from Share Prices," RBA Research Discussion Papers rdp9302, Reserve Bank of Australia.
    20. Jord�, �scar & Richter, Bj�rn & Schularick, Moritz & Taylor, Alan M., 2017. "Bank Capital Redux: Solvency, Liquidity, and Crisis," CEPR Discussion Papers 11934, C.E.P.R. Discussion Papers.
    21. Boyd, John H. & Heitz, Amanda, 2016. "The social costs and benefits of too-big-to-fail banks: A “bounding” exercise," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 251-265.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2016/224. 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: (Akshay Modi). General contact details of provider: http://edirc.repec.org/data/imfffus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.