'Too-Big-To-Fail' and its Impact on Safety Net Subsidies and Systemic Risk

39 Pages Posted: 30 Mar 2011

See all articles by Klaus Schaeck

Klaus Schaeck

University of Bristol

Tim Mi Zhou

Sunderland Business School

Philip Molyneux

University of Sharjah; University of Sharjah - College of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2010

Abstract

The recent financial turmoil and the bailouts of some large financial institutions in the US and Europe have raised major concerns that the increased size and complexity of financial institutions may give rise to negative ramifications for systemic risk. In this paper, we investigate whether banks exploit safety net subsidies by engaging in merger and acquisition activities (M&As) and rationally increase their risk taking behaviour to the detriment of the soundness of the banking sector. Using information on bank M&As between 1997 and 2008 for a sample of nine EU economies, we find that banks pay higher merger premiums in larger M&As. Moreover, merger premiums paid in the past are positively associated with higher possibility of becoming too-big-to-fail. Finally, we find no strong evidence that M&A activities tend to be positively related to the increase of systemic risk.

Keywords: Too-big-to-fail, mergers and acquisitions, systemic risk

JEL Classification: G14, G18, G21, G34

Suggested Citation

Schaeck, Klaus and Zhou, Tim Mi and Molyneux, Philip and Molyneux, Philip, 'Too-Big-To-Fail' and its Impact on Safety Net Subsidies and Systemic Risk (June 1, 2010). CAREFIN Research Paper No. 09/2010, Available at SSRN: https://ssrn.com/abstract=1798633

Klaus Schaeck

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, Avon BS8 ITH
United Kingdom

Tim Mi Zhou

Sunderland Business School ( email )

The Reg Vardy Centre
St Peter's Way
Sunderland, SR6 0DD
United Kingdom
0191 515 3341 (Phone)

Philip Molyneux (Contact Author)

University of Sharjah ( email )

College of Business Administration
University of Sharjah
Sharjah, Sharjah
United Arab Emirates

HOME PAGE: http://www.sharjah.ac.ae/en/academics/Colleges/business/Pages/ppl_detail.aspx?mcid=1

University of Sharjah - College of Business Administration ( email )

University City Road
Sharjah, 27272
United Arab Emirates

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