Paying To Be Too Big Too Fail

Wed, 20 Oct 2010 14:36:31 +0000

This abstract made me sit up and take notice:


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


Julapa Jagtiani
Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Elijah Brewer III
DePaul University - Department of Finance; Federal Reserve Bank of Chicago

December 3, 2009

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.

Keywords: bank merger, too-big-to-fail, TBTF subsidy, systemically important bank
JEL Classifications: G21, G28, G34

You can download the paper at the link or find it here.