How Much Does It Cost to be TBTF?

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

Julapa Jagtiani & Elijah Brewer
Federal Reserve Bank Working Paper, December 2009

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 $14 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 deals. Our estimated TBTF subsidy is large enough to create serious concern, since recent assisted mergers have allowed TBTF organizations to become even bigger and for nonbanks to become part of TBTF banking organizations, thus extending the TBTF subsidy beyond banking.

(Nod to Kevin L)