Abstract

http://ssrn.com/abstract=1548105
 
 

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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

FRB of Philadelphia Working Paper No. 09-34
AFA 2011 Denver Meetings Paper

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.

Number of Pages in PDF File: 58

Keywords: bank merger, too-big-to-fail, TBTF subsidy, systemically important bank

JEL Classification: G21, G28, G34

working papers series


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Date posted: February 18, 2010  

Suggested Citation

Jagtiani, Julapa and Brewer, Elijah, How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important? (December 3, 2009). FRB of Philadelphia Working Paper No. 09-34; AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1548105 or http://dx.doi.org/10.2139/ssrn.1548105

Contact Information

Julapa A. Jagtiani (Contact Author)
Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )
Ten Independence Mall
Philadelphia, PA 19106-1574
United States
Elijah Brewer III
DePaul University - Department of Finance ( email )
1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
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