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Does banks size distort market prices? Evidence for too-big-to-fail in the CDS market

Manja Völz and Michael Wedow

No 2009,06, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank

Abstract: This paper examines the potential distortion of prices in the CDS market caused by too-big-to-fail. Overall, we find evidence for market discipline in the CDS market. However, CDS prices are distorted due to a size effect which arises when investors expect a public bail-out as a result of too-big-to-fail. A one percentage point increase in size reduces the CDS spread of a bank by about two basis points. We further find that some banks have already reached a size that makes them too-big-to-be-rescued. While the price distortion for these banks decreases the existence of banks that are considered to be toobig-to-rescue raises important new issues for banking supervisors.

Keywords: Market Discipline; Too Big To Fail; Too Big to Rescue CDS Spreads (search for similar items in EconPapers)
JEL-codes: G14 G21 G28 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ban, nep-reg and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp2:200906

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