Whose Credit Line is it Anyway: An Update on Banks' Implicit Subsidies

Tryggvi Gudmundsson

No 2016/224, IMF Working Papers from International Monetary Fund

Abstract: The post-crisis financial sector framework reform remains incomplete. While capital and liquidity requirements have been strengthened, doubts remain over other aspects, including the fact that expectations of government support for systemically-important banks (SIBs) remain intact. In this paper, we use a jump diffusion option-pricing approach to provide estimates of implicit subsidies gained by these banks due to the expectation of protection to creditors provided by governments. While these subsidies have declined in the post-crisis era as volatility has declined and capital levels have increased, they remain non-trivial. Even conservative parameterizations of default and loss probabilities lead to macroeconomically significant figures.

Keywords: WP; fair value; Implicit subsidies; systemically-important banks; capital regulation; bank assets; asset price assumption; asset volatility; recovery rate; bank's assets; market value of assets; value destruction; Asset prices; Stocks; Asset valuation; Global systemically important banks; Global (search for similar items in EconPapers)
Pages: 27
Date: 2016-11-16
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Citations: View citations in EconPapers (6)

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