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Are the Borrowing Costs of Large Financial Firms Unusual?

Author

Listed:
  • Javed Ahmed

    () (Office of Financial Research
    Federal Reserve Board of Governors)

  • Christopher Anderson

    () (Harvard University)

  • Rebecca Zarutskie

    () (Federal Reserve Board of Governors)

Abstract

Expectations of government support for large financial firms are often based on their lower borrowing costs relative to smaller financial firms. However, large financial firms are not unique in this regard: larger firms enjoy lower borrowing costs in several industries. We show that size-related borrowing cost advantages are not unusually large in the financial industry, and spreads are actually more sensitive to borrower size in several nonfinancial industries. These size-related differences are not explained by differences in risk and are only partially explained by higher liquidity and recovery rates for larger borrowers. Our results suggest that estimates of implicit government guarantees for financial firms may overemphasize the relationship between size-related borrowing cost differentials and expected bailouts. Our analysis also suggests that in the period leading to the 2008-9 financial crisis, perceptions of reduced risk may have lowered borrowing costs for the financial industry as a whole.

Suggested Citation

  • Javed Ahmed & Christopher Anderson & Rebecca Zarutskie, 2015. "Are the Borrowing Costs of Large Financial Firms Unusual?," Working Papers 15-10, Office of Financial Research, US Department of the Treasury.
  • Handle: RePEc:ofr:wpaper:15-10
    as

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    References listed on IDEAS

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    Cited by:

    1. Zaghini, Andrea, 2016. "Fragmentation and heterogeneity in the euro-area corporate bond market: Back to normal?," Journal of Financial Stability, Elsevier, vol. 23(C), pages 51-61.
    2. Tölö, Eero & Jokivuolle, Esa & Virén, Matti, 2015. "Are too-big-to-fail banks history in Europe? Evidence from overnight interbank loans," Research Discussion Papers 29/2015, Bank of Finland.
    3. Joseph P. Hughes & Loretta J. Mester, 2018. "The Performance of Financial Institutions: Modeling, Evidence, and Some Policy Implications," Departmental Working Papers 201805, Rutgers University, Department of Economics.
    4. Johnston, Ryan, 2016. "Banking Policy Review: Did Dodd–Frank End ‘Too Big to Fail’?," Banking Policy Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 16-20.
    5. Kim Ristolainen, 2016. "The relationship between distance-to-default and CDS spreads as measures of default risk for European banks," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 1(5), pages 121-143, June.
    6. Zaghini, Andrea, 2019. "The CSPP at work: Yield heterogeneity and the portfolio rebalancing channel," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 282-297.
    7. Gary Gorton & Ellis W. Tallman, 2016. "Too Big to Fail before the Fed," American Economic Review, American Economic Association, vol. 106(5), pages 528-532, May.
    8. Riccardo Settimo, 2019. "Higher multilateral development bank lending, unchanged capital resources and triple-A rating. A possible trinity after all?," Questioni di Economia e Finanza (Occasional Papers) 488, Bank of Italy, Economic Research and International Relations Area.
    9. Galina Hale & Tumer Kapan & Camelia Minoiu, 2019. "Shock Transmission through Cross-Border Bank Lending: Credit and Real Effects," Finance and Economics Discussion Series 2019-052, Board of Governors of the Federal Reserve System (US).
    10. Antill, Samuel & Sarkar, Asani, 2018. "Is size everything?," Staff Reports 864, Federal Reserve Bank of New York.
    11. Jill Cetina & Bert Loudis, 2015. "The Influence of Systemic Importance Indicators on Banks' Credit Default Swap Spreads," Working Papers 15-09, Office of Financial Research, US Department of the Treasury.
    12. repec:bof:bofrdp:urn:nbn:fi:bof-201512151482 is not listed on IDEAS
    13. Gimber, Andrew & Rajan, Aniruddha, 2019. "Bank funding costs and capital structure," Bank of England working papers 805, Bank of England.

    More about this item

    Keywords

    Too-big-to-fail; borrowing costs; large banks;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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