Quantifying Structural Subsidy Values for Systemically Important Financial Institutions

30 Pages Posted: 2 Feb 2012

See all articles by S. M. Ali Abbas

S. M. Ali Abbas

International Monetary Fund (IMF)

Alexander Klemm

International Monetary Fund (IMF)

Junhyung Park

affiliation not provided to SSRN

Sukhmani Bedi

affiliation not provided to SSRN

Date Written: May 2012

Abstract

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

Abbas, S. M. Ali and Klemm, Alexander and Park, Junhyung and Bedi, Sukhmani, Quantifying Structural Subsidy Values for Systemically Important Financial Institutions (May 2012). IMF Working Paper No. 12/28. Available at SSRN: https://ssrn.com/abstract=1997741

S. M. Ali Abbas

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alexander Klemm (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Junhyung Park

affiliation not provided to SSRN

No Address Available

Sukhmani Bedi

affiliation not provided to SSRN

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