Are banks still 'too big to fail'? - A market perspective

Nicole Allenspach, Oleg Reichmann and Javier Rodriguez-Martin

No 2021-18, Working Papers from Swiss National Bank

Abstract: This paper aims at deriving the market's assessment as to whether banks worldwide still benefit from a Too Big To Fail (TBTF) subsidy. Such a subsidy reflects the market's expectation of government support in the event of a crisis and results in reduced funding costs for the benefiting bank. To capture this effect, we use two different extensions of the Merton (1974) framework. We find that large banks benefit from a TBTF subsidy, while large nonfinancial firms do not. This subsidy has declined somewhat since the Global Financial Crisis (GFC) but remains larger than before the crisis. These conclusions also hold when considering Contingent Convertible (CoCos) and bail-in bonds as fully loss-absorbing. Moreover, we find differences in the TBTF subsidy across jurisdictions and provide evidence that these can to a large extent be explained by differences in bank health.

Keywords: Banking; too big to fail; CreditEdge; CreditGrades (search for similar items in EconPapers)
JEL-codes: G12 G18 G21 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2021-18

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