Journal of Financial Services Research

, Volume 43, Issue 1, pp 1–35 | Cite as

How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important?

Article

Abstract

This paper estimates the value of the too-big-to-fail (TBTF) subsidy. Using data from the merger boom of 1991–2004, we 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. We 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, we find that both the stock and bond markets reacted positively to these TBTF merger deals. Our 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 merger Too-big-to-fail TBTF subsidy Systemically important bank 

JEL Code

G21 G28 G34 

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Kellstadt Graduate School of BusinessDePaul UniversityChicagoUSA
  2. 2.Federal Reserve Bank of PhiladelphiaSupervision, Regulation and Credit DepartmentPhiladelphiaUSA

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