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The Effect of TBTF Deregulation on Bank Cost of Funds

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Listed:
  • Lazarus Angbazo
  • Anthony Saunders

Abstract

This paper tests the hypothesis that changes to the "too-big-to-fail" (TBTF) doctrine under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) increased the risk of deposit loss and the cost of funds for large banks. Furthermore, the paper analyzes the implications of the National Depositor Preference Law of 1993 on the priority, risk, and cost of non-deposit funds in banking. One consistent finding is that the systematic risk coefficient for large banks declined sharply after the passage of FDICIA. In addition, the average cost of deposits and non-deposit funds were lower in the later period, consistent with a generally lower level of interest rates as well as a reduction in the required risk premium. The data did not show a corresponding decline in the systematic risk or cost of funds for small banks. Finally we examined the stock market reaction of the sample banks to the events leading up to FDICIA's passage. In general, the distribution of wealth effects is consistent with the hypothesis that the impact of reduced deposit coverage for failing banks was confined to the large bank segment. This paper was presented at the Financial Institutions Center's conference on Performance of Financial Institutions, May 8-10, 1997.

Suggested Citation

  • Lazarus Angbazo & Anthony Saunders, "undated". "The Effect of TBTF Deregulation on Bank Cost of Funds," Center for Financial Institutions Working Papers 97-25, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:97-25
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    File URL: http://fic.wharton.upenn.edu/fic/papers/97/saunders.pdf
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    References listed on IDEAS

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    1. Larry D. Wall, 2010. "Too-big-to-fail after FDICIA," Economic Review, Federal Reserve Bank of Atlanta.
    2. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
    3. Schwert, G William, 1981. "Using Financial Data to Measure Effects of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 121-158, April.
    4. repec:bla:joares:v:21:y:1983:i:1:p:184-221 is not listed on IDEAS
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    Cited by:

    1. Elijah Brewer & Julapa Jagtiani, 2007. "How much would banks be willing to pay to become "too-big-to-fail" and to capture other benefits?," Research Working Paper RWP 07-05, Federal Reserve Bank of Kansas City.
    2. Mark Flannery, 2001. "The Faces of “Market Discipline”," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(2), pages 107-119, October.

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