Is bailout insurance and tail risk priced in bank equities?

Luca Del Viva, Eero Kasanen, Anthony Saunders and Lenos Trigeorgis

Journal of Financial Stability, 2021, vol. 55, issue C

Abstract: We present a pricing model of bank bailout insurance guarantees against tail risk and empirical evidence that provides a rational explanation why big bank equities “underperform” relative to small banks during normal times while they “overperform” during crises. A new measure accounting for left-tail risk protection against losses conditional on a crisis explains the “underperformance” of large banks during normal periods. Over the long-term spanning several economic cycles, bank assets are fairly priced regardless of size. Our empirical evidence supports our model’s predicted pattern of excess bank return reversals across economic cycles following Too-Big-To-Fail (TBTF) bailout policy in 1984.

Keywords: TBTF; Government guarantees; Bailouts; Bank equity returns (search for similar items in EconPapers)
JEL-codes: G01 G12 G20 G28 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:55:y:2021:i:c:s1572308921000681

DOI: 10.1016/j.jfs.2021.100909

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