How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important?
Elijah Brewer III,DePaul University, and Julapa Jagtiani,Federal Reserve Bank of Philadelphia
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.
Elijah Brewer III,DePaul University, and Julapa Jagtiani,Federal Reserve Bank of Philadelphia
September 2, 2011
Forthcoming in Journal of Financial Services Research
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.
1 comment:
IMHO If you cannot let banks fail, the federal reserve system is a failure and should be scrapped and replaced with a new system build and designed from the ground up.
Of course than ain't gonna happen.
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