Quantifying Structural Subsidy Values for Systemically Important Financial Institutions
30 Pages Posted: 2 Feb 2012
Date Written: May 2012
Claimants to SIFIs receive transfers when governments are forced into bailouts. Ex ante, the bailout expectation lowers daily funding costs. This funding cost differential reflects both the structural level of the government support and the time-varying market valuation for such a support. With large worldwide sample of banks, we estimate the structural subsidy values by exploiting expectations of state support embedded in credit ratings and by using long-run average value of rating bonus. It was already sizable, 60 basis points, as of the end-2007, before the crisis. It increased to 80 basis points by the end-2009.
Keywords: Banks, Subsidies, probability, financial institutions, samples, financial stability, financial sector, significance level, statistics, financial system, bond, moral hazard, dummy variable, outliers, regression analysis, stock price, significance levels, probability density, equation, junk bonds, sample selection, stock returns, bond spreads, descriptive statistics, bonds, stock prices
JEL Classification: G21, G28, H11
Suggested Citation: Suggested Citation