The Value of Implicit Guarantees
University of Oxford - Oxford-Man Institute of Quantitative Finance; University of Oxford - Said Business School
Robert C. Merton
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit
September 1, 2012
Firms considered "too big to fail'' (TBTF) benefit from access to cheaper funding during crises. Using a comprehensive data set of bond characteristics and prices in the primary and secondary market for a sample of 74 U.S. financial institutions, we investigate how reduced debt capital costs affect the positions of shareholders and creditors. Issue and transaction prices are revalued on the basis of a funding advantage estimated using a structural model. Our results indicate that wealth transfers to investors sum up to $365bn and that banks shifted to fixed-rate short-term funding to take advantage of their TBTF status.
Number of Pages in PDF File: 46
Keywords: Financial crisis, Systemic risk, Too big to fail, Government guarantees
JEL Classification: G01, G12, G14, G18
Date posted: March 11, 2013
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