The Value of Implicit Guarantees
46 Pages Posted: 11 Mar 2013
Date Written: September 1, 2012
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
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