‘Too Systemically Important to Fail’ in Banking

Bangor Business School Working Paper No. 11/011

45 Pages Posted: 16 Jan 2012

See all articles by Philip Molyneux

Philip Molyneux

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

Klaus Schaeck

University of Bristol

Tim Mi Zhou

Sunderland Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2011

Abstract

The recent financial turmoil and bailouts of a large number of banks have raised substantial policy concerns regarding banks that are considered ‘Too-systemically important-to-fail’ (TSITF). In this paper, we exploit a sample of bank mergers and acquisitions (M&As) between 1997 and 2008 in nine EU economies and use an innovative setup derived from the frontier literature to capture safety net subsidy effects and evaluate their ramifications for systemic risk. We focus on three closely related phenomena: First, we use frontier methods to extract information on whether banks deliberately pay premiums for being considered TSITF. Second, we incorporate the safety net subsidies derived from the frontier methods in a probit model to assess whether they affect the probability of a bank being rescued during the recent crisis. We find that safety net benefits derived from M&A activity have a significantly positive association with the rescue probability, suggesting the moral hazard issue in banking systems pre-crisis. Third, we do not find that gaining safety net subsidies leads to TSITF bank’s increased interdependence on its peer banks. From a policy perspective, the findings help understand whether banks exploit national safety nets and increase instability in the financial system.

Keywords: systemic importance, systemic risk, merger and acquisition, banking

JEL Classification: G14, G18, G21, G34

Suggested Citation

Molyneux, Philip and Molyneux, Philip and Schaeck, Klaus and Zhou, Tim Mi, ‘Too Systemically Important to Fail’ in Banking (November 1, 2011). Bangor Business School Working Paper No. 11/011, Available at SSRN: https://ssrn.com/abstract=1986013 or http://dx.doi.org/10.2139/ssrn.1986013

Philip Molyneux (Contact Author)

University of Sharjah - College of Business Administration ( email )

University City Road
Sharjah, 27272
United Arab Emirates

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

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)

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