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The Value of Implicit Guarantees

46 Pages Posted: 11 Mar 2013  

Zoe Tsesmelidakis

University of Oxford - Oxford-Man Institute of Quantitative Finance; University of Oxford - Said Business School

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit

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Date Written: September 1, 2012

Abstract

Firms considered "too big to fail'' (TBTF) benefit from access to cheaper funding during crises. Using a comprehensive data set of bond characteristics and prices in the primary and secondary market for a sample of 74 U.S. financial institutions, we investigate how reduced debt capital costs affect the positions of shareholders and creditors. Issue and transaction prices are revalued on the basis of a funding advantage estimated using a structural model. Our results indicate that wealth transfers to investors sum up to $365bn and that banks shifted to fixed-rate short-term funding to take advantage of their TBTF status.

Keywords: Financial crisis, Systemic risk, Too big to fail, Government guarantees

JEL Classification: G01, G12, G14, G18

Suggested Citation

Tsesmelidakis, Zoe and Merton, Robert C., The Value of Implicit Guarantees (September 1, 2012). Available at SSRN: https://ssrn.com/abstract=2231317 or http://dx.doi.org/10.2139/ssrn.2231317

Zoe Tsesmelidakis (Contact Author)

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
E62-634
Cambridge, MA 02139-4307
United States
617 715 4866 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6678 (Phone)

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