Abstract

http://ssrn.com/abstract=1961656
 
 

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The End of Market Discipline? Investor Expectations of Implicit Government Guarantees


Viral V. Acharya


New York University - Leonard N. Stern School of Business; Centre for International Finance and Regulation (CIFR); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Deniz Anginer


Virginia Tech Pamplin Business School; World Bank - Financial and Private Sector Development

A. Joseph Warburton


Syracuse University - College of Law; Syracuse University - Whitman School of Management

June 1, 2014


Abstract:     
We find that bondholders of major financial institutions have an expectation that the government will shield them from large financial losses and, as a result, they do not accurately price risk. Using bonds traded in the U.S. between 1990 and 2012, and using alternative approaches to address endogeneity, we find that bond credit spreads are sensitive to risk for most financial institutions, but not for the largest institutions. This expectation of government support constitutes a subsidy to large financial institutions, allowing them to borrow at lower rates. Recent financial regulations that seek to address too-big-to-fail have not had a significant impact in eliminating expectations of government support.

Number of Pages in PDF File: 64

Keywords: Too big to fail, financial crisis, Dodd-Frank, bailout, implicit guarantee, moral hazard, systemic risk

JEL Classification: G21, G24, G28

working papers series


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Date posted: November 19, 2011 ; Last revised: June 25, 2014

Suggested Citation

Acharya, Viral V. and Anginer, Deniz and Warburton, A. Joseph, The End of Market Discipline? Investor Expectations of Implicit Government Guarantees (June 1, 2014). Available at SSRN: http://ssrn.com/abstract=1961656 or http://dx.doi.org/10.2139/ssrn.1961656

Contact Information

Viral V. Acharya
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for International Finance and Regulation (CIFR) ( email )
Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Deniz Anginer (Contact Author)
Virginia Tech Pamplin Business School ( email )
1818 H Street, NW
Washington, DC 20433
United States
World Bank - Financial and Private Sector Development ( email )
United States
A. Joseph Warburton
Syracuse University - College of Law ( email )
Syracuse, NY 13244-1030
United States
Syracuse University - Whitman School of Management ( email )
Syracuse, NY
United States
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