Safety-Net Benefits Conferred on Difficult-to-Fail-And-Unwind Banks in the US and EU Before and During the Great Recession

43 Pages Posted: 12 Jul 2011

See all articles by Edward J. Kane

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Santiago Carbo-Valverde

Bangor Business School; Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF)

Francisco Rodriguez Fernandez

University of Granada

Multiple version iconThere are 3 versions of this paper

Date Written: July 1, 2011

Abstract

In this paper we model and estimate ex ante safety-net benefits at a sample of large banks in US and Europe during 2003-2008. Our results suggest that difficult-to-fail and unwind (DFU) banks enjoyed substantially higher ex ante benefits than other institutions. Safety-net benefits prove significantly larger for DFU firms in Europe and bailout decisions less driven by asset size than in the US. We also find that a proxy for regulatory capture helps to explain bailout decisions in Europe. A policy implication of our findings is that authorities could better contain safety-net benefits if they refocused their information systems on measuring volatility as well as capital.

Keywords: safety net, too big to fail policy, difficult-to-fail banks, financial crisis

JEL Classification: G21, G01

Suggested Citation

Kane, Edward J. and Carbo-Valverde, Santiago and Fernandez, Francisco Rodriguez, Safety-Net Benefits Conferred on Difficult-to-Fail-And-Unwind Banks in the US and EU Before and During the Great Recession (July 1, 2011). Paolo Baffi Centre Research Paper No. 2011-95, Available at SSRN: https://ssrn.com/abstract=1884131 or http://dx.doi.org/10.2139/ssrn.1884131

Edward J. Kane (Contact Author)

Boston College - Department of Finance ( email )

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National Bureau of Economic Research (NBER)

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Santiago Carbo-Valverde

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF) ( email )

Serrano Anguita 9
Madrid, Madrid 28004
Spain

Francisco Rodriguez Fernandez

University of Granada

C/Rector López Argueta S/N
Granada, Granada 18071
Spain

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