How much did banks pay to become too-big-to-fail and to become systematically important?

How much did banks pay to become too-big-to-fail and to become systematically important?

Elijah Brewer and Julapa A. Jagtiani (julapa.jagtiani@phil.frb.org)

No 11-37, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper estimates the value of the too-big-to-fail (TBTF) subsidy. Using data from the merger boom of 1991-2004, the authors find that banking organizations were willing to pay an added premium for mergers that would put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. They estimate at least $15 billion in added premiums for the eight merger deals that brought the organizations to over $100 billion in assets. In addition, the authors find that both the stock and bond markets reacted positively to these TBTF merger deals. Their estimated TBTF subsidy is large enough to create serious concern, particularly since the recently assisted mergers have effectively allowed for TBTF banking organizations to become even bigger and for nonbanks to become part of TBTF banking organizations, thus extending the TBTF subsidy beyond banking.

Keywords: Bank; mergers (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
Date: 2011
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Working Paper: How much did banks pay to become too-big-to-fail and to become systemically important? (2009) Downloads
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