How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important?

57 Pages Posted: 6 Sep 2011

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

Multiple version iconThere are 3 versions of this paper

Date Written: September 2, 2011

Abstract

This paper estimates the value of the too-big-to-fail (TBTF) subsidy. Using data from the merger boom of 1991-2004, the authors find that banking organizations were willing to pay an added premium for mergers that would put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. They estimate at least $15 billion in added premiums for the eight merger deals that brought the organizations to over $100 billion in assets. In addition, the authors find that both the stock and bond markets reacted positively to these TBTF merger deals. Their estimated TBTF subsidy is large enough to create serious concern, particularly since the recently assisted mergers have effectively allowed for TBTF banking organizations to become even bigger and for nonbanks to become part of TBTF banking organizations, thus extending the TBTF subsidy beyond banking.

Keywords: bank merger, too-big-to-fail, TBTF subsidy, systemically important bank

JEL Classification: G21, G28, G34

Suggested Citation

Brewer, Elijah and Jagtiani, Julapa A., How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important? (September 2, 2011). FRB of Philadelphia Working Paper No. 11-37, Available at SSRN: https://ssrn.com/abstract=1923325 or http://dx.doi.org/10.2139/ssrn.1923325

Elijah Brewer (Contact Author)

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

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

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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