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
Date Written: July 1, 2011
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: Suggested Citation