Resolving “Too Big to Fail”

Nicola Cetorelli and James Traina ()

No 859, Staff Reports from Federal Reserve Bank of New York

Abstract: Using a synthetic control research design, we find that ?living will? regulation increases a bank?s annual cost of capital by 22 basis points, or 10 percent of total funding costs. This effect is stronger in banks that were measured as systemically important before the regulation?s announcement. We interpret our findings as a reduction in ?too big to fail? subsidies. The size of this effect is large: a back-of-the-envelope calculation implies a subsidy reduction of $42 billion annually. The impact on equity costs drives the main effect. The impact on deposit costs is statistically indistinguishable from zero, representing a good placebo test for our empirical strategy.

Keywords: Dodd-Frank; resolution plans; too big to fail; cost of capital; time consistency (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2018-06-01
New Economics Papers: this item is included in nep-ban
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Journal Article: Resolving “Too Big to Fail” (2021)
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