Safety-net benefits conferred on difficult-to-fail-and-unwind banks in the US and EU before and during the great recession

Santiago Carbó-Valverde, Edward Kane and Francisco Rodriguez-Fernandez
Authors registered in the RePEc Author Service: Francisco Rodríguez Fernández () and Santiago Carbo Valverde

Journal of Banking & Finance, 2013, vol. 37, issue 6, 1845-1859

Abstract: This paper investigates the links between regulatory arbitrage, financial instability, and taxpayer loss exposures. We model and estimate ex ante safety-net benefits from increased leverage and asset volatility at a sample of large banks in US and Europe during 2003–2008. Hypothesis tests indicate that, in both crisis and precrisis years, difficult-to-fail-and-unwind (DFU) banks enjoyed substantially higher ex ante benefits than other institutions. Compared to the US sample, safety-net benefits prove significantly larger for DFU firms in Europe and bailout decisions are less driven by asset size. Introducing a proxy for differences in government susceptibility to regulatory capture helps to explain bailout decisions in Europe. Our findings suggest that authorities in both venues could better contain safety-net benefits if they refocused their information systems on monitoring volatility as well as capital.

Keywords: Safety net; Too big to fail policy; Regulatory arbitrage; Difficult-to-fail banks; Financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G21 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Safety-net benefits conferred on difficulty-to-fail-and-unwind banks in the U.S. and EU before and during the Great Recession (2011)
Working Paper: Safety-Net Benefits Conferred on Difficult-to-Fail-and-Unwind Banks in the US and EU Before and During the Great Recession (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:6:p:1845-1859

DOI: 10.1016/j.jbankfin.2012.07.024

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