Do Big Bank Equityholders 'Pay' for Bailout Insurance Over the Economic Cycle?

39 Pages Posted: 20 Jul 2017

See all articles by Luca Del Viva

Luca Del Viva

ESADE Business School

Eero Kasanen

Aalto University - School of Business

Anthony Saunders

New York University - Leonard N. Stern School of Business

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration; King’s College London; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: July 17, 2017

Abstract

Contrary to public perception and previous literature on public bailout subsidies, we find over the recent 43-year period equityholders in big banks paid fairly for TBTF bailout insurance in terms of equity returns. In normal (non-crisis) periods, after TBTF in 1984, big banks pay an “insurance fee” for protection against severe losses in a crisis accepting a higher net regulatory burden reflected in a -9% per annum lower equity return relative to small banks. Moreover, a measure of left-tail risk protection, conditional on a crisis, fully explains this Big−Small bank equity premium “fee” paid in normal times. During crises, big banks earn higher returns (a reversal of that observed in normal times), which on average offset the big bank equity return discount in non- crisis times. Over several economic cycles, there is no abnormal Big−Small bank equity premium and bailout insurance is fairly priced for equityholders in that there is no difference between big and small bank equity returns.

Keywords: TARP, Too-big-to-Fail, TBTF, Bailout, Banks, Financial Institution, Big Banks

JEL Classification: G01, G12, G20, G28.

Suggested Citation

Del Viva, Luca and Kasanen, Eero and Saunders, Anthony and Trigeorgis, Lenos, Do Big Bank Equityholders 'Pay' for Bailout Insurance Over the Economic Cycle? (July 17, 2017). Available at SSRN: https://ssrn.com/abstract=3003900 or http://dx.doi.org/10.2139/ssrn.3003900

Luca Del Viva (Contact Author)

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

Eero Kasanen

Aalto University - School of Business ( email )

P.O. Box 21210
Helsinki, FI-00076
Finland

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
00357 2 338762 (Phone)
00357 2 339063 (Fax)

King’s College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

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

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

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