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Quantifying structural subsidy values for systemically important financial institutions

Kenichi Ueda () and Beatrice Weder di Mauro

Journal of Banking & Finance, 2013, vol. 37, issue 10, 3830-3842

Abstract: Claimants to Systemically Important Financial Institutions (SIFIs) would receive transfers when governments are forced into bailouts. Ex ante, this bailout expectation lowers SIFIs’ daily funding costs. The funding cost advantage reflects both the structural level of the government support and the time-varying market valuation for such a support. Based on a large worldwide sample of banks, we estimate the value of the structural subsidy, by exploiting expectations of state support embedded in credit ratings and by applying the long-run average value of the rating bonus. The value of the structural subsidy was already sizable, 60basis points (bp), as of the end-2007, before the crisis. It increased to 80bp by the end-2009.

Keywords: Systemically important financial institutions; Bank funding subsidy; Bank bailout (search for similar items in EconPapers)
JEL-codes: G21 G28 H12 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Quantifying Structural Subsidy Values for Systemically Important Financial Institutions (2012) Downloads
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Handle: RePEc:eee:jbfina:v:37:y:2013:i:10:p:3830-3842