Too big to fail after all these years

Donald Morgan and Kevin Stiroh (stiroh84@optonline.net)

No 220, Staff Reports from Federal Reserve Bank of New York

Abstract: The naming of eleven banks as \\"too big to fail (TBTF)\\" in 1984 led bond raters to raise their ratings on new bond issues of TBTF banks about a notch relative to those of other, unnamed banks. The relationship between bond spreads and ratings for the TBTF banks tended to flatten after that event, suggesting that investors were even more optimistic than raters about the probability of support for those banks. The spread-rating relationship in the 1990s remained flatter for TBTF banks (or their descendants) even after the passage of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), suggesting that investors still see those banks as TBTF. Until investors are disabused of such beliefs, investor discipline of big banks will be less than complete.

Keywords: Corporate bonds; Bank management; Bank failures (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-fmk
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Citations: View citations in EconPapers (40)

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