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Does Size of Banks Really Matter? Evidence from Credit Default Swaps Market Data

İlker Arslan and Ayla Ogus Binatli
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İlker Arslan: İzmir Ekonomi Üniversitesi

Iktisat Isletme ve Finans, 2014, vol. 29, issue 338, 67-90

Abstract: This study aims to discover whether markets take into account the phenomenon known as Too Big to Fail. Using Credit Default Swaps market data, which reflects the risk, markets attribute to banks, we calculate the default probabilities of banks over one, two, and three year periods. These results are then regressed with financial values such as total assets, total shareholders’ equity and net income. Subsequently, the study is extended and the regression analysis repeated using Return on Assets as dependent variable. We find that markets place emphasis on profitability rather than size when pricing the riskiness of a bank. We conclude that the well-known concept of ‘Too Big to Fail’ cannot be considered as a concept with much validity, but the phrase ‘Too Profitable to Fail’ may provide a more accurate assessment of the situation.

Keywords: Banking; Too Big to Fail; Credit Default Swaps (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2014
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