How Much Would Banks Be Willing to Pay to Become 'Too-Big-to-Fail' and to Capture Other Benefits

40 Pages Posted: 10 Aug 2007

See all articles by Elijah Brewer

Elijah Brewer

DePaul University - Department of Finance; Federal Reserve Bank of Chicago

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: July 2007

Abstract

This paper examines an important aspect of the "too-big-to-fail" (TBTF) policy employed by regulatory agencies in the United States. How much is it worth to become TBTF? How much has the TBTF status added to bank shareholders' wealth? Using market and accounting data during the merger boom (1991-2004) when larger banks greatly expanded their size through mergers and acquisitions, we find that banking organizations are willing to pay an added premium for mergers that will put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $14 billion in added premiums for the nine merger deals that brought the organizations over $100 billion in total assets. These added premiums may reflect that perceived benefits of being TBTF and/or other potential benefits associated with size.

Keywords: Bank merger, too-big-to-fail, TBTF subsidy, large bank subsidy

JEL Classification: G21, G28, G34

Suggested Citation

Brewer, Elijah and Jagtiani, Julapa A., How Much Would Banks Be Willing to Pay to Become 'Too-Big-to-Fail' and to Capture Other Benefits (July 2007). Available at SSRN: https://ssrn.com/abstract=1003163 or http://dx.doi.org/10.2139/ssrn.1003163

Elijah Brewer

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Julapa A. Jagtiani (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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