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When enough is not enough: bank capital and the Too-Big-To-Fail subsidy

Michael B. Imerman ()
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Michael B. Imerman: Claremont Graduate University

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 4, No 7, 1406 pages

Abstract: Abstract This paper takes a unique approach to study the relationship between bank capital and Too-Big-To-Fail (TBTF) during the Financial Crisis. A structural credit risk model is used to compute implied market value capital ratios which, when compared to traditional risk-based capital, illustrates the capital deficiency of large BHCs. As these BHCs’ implied capital deteriorated, their default probabilities spiked. The model is then used to solve for the amount of capital needed to reduce default probabilities. This amount is compared to the TARP capital infusions to quantify the TBTF subsidy which is associated with size and reliance on short-term volatile funding.

Keywords: Bank capital; Too-Big-To-Fail; TARP; Structural credit risk model; Bank default probability (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 G32 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11156-020-00877-x

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