The Value of Implicit Guarantees

46 Pages Posted: 19 Aug 2013

See all articles by Zoe Tsesmelidakis

Zoe Tsesmelidakis

University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit

Multiple version iconThere are 3 versions of this paper

Date Written: November 2012

Abstract

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.

Keywords: financial crisis, systemic risk, too big to fail, government guarantees

JEL Classification: G01, G12, G14, G18

Suggested Citation

Tsesmelidakis, Zoe and Tsesmelidakis, Zoe and Merton, Robert C., The Value of Implicit Guarantees (November 2012). 26th Australasian Finance and Banking Conference 2013, Available at SSRN: https://ssrn.com/abstract=2312157 or http://dx.doi.org/10.2139/ssrn.2312157

Zoe Tsesmelidakis (Contact Author)

University of Oxford - Said Business School ( email )

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University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

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Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER)

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Harvard Business School - Finance Unit ( email )

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