Abstract

http://ssrn.com/abstract=1961656
 
 

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


Viral V. Acharya


New York University - Leonard N. Stern School of Business; 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

December 2013


Abstract:     
We find that bondholders of major financial institutions have an expectation that the government will shield them from losses and, as a result, they do not accurately price risk. While bond credit spreads are sensitive to risk for most financial institutions, credit spreads lack risk sensitivity for the largest institutions. This expectation of public support constitutes a subsidy to large financial institutions, allowing them to borrow at government-subsidized rates. We find that passage of Dodd-Frank did not eliminate expectations of government support. The issue of too-big-to-fail remains unresolved.

Number of Pages in PDF File: 61

Keywords: Banking, too big to fail, too-big-to-fail, TBTF, financial institutions, financial crisis, safety net subsidy, bailout, implicit subsidy, implicit guarantee, government guarantee, public guarantee, state guarantee, asymmetric guarantee, conjectural guarantee, moral hazard, systemic risk

JEL Classification: G21, G24, G28

working papers series


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Date posted: November 19, 2011 ; Last revised: December 29, 2013

Suggested Citation

Acharya, Viral V. and Anginer, Deniz and Warburton, A. Joseph, The End of Market Discipline? Investor Expectations of Implicit State Guarantees (December 2013). 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 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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