Evidence from the Bond Market on Banks' 'Too-Big-To-Fail' Subsidy

24 Pages Posted: 4 Apr 2014

Date Written: March 31, 2014

Abstract

Using information from bonds issued over the past twenty years, this study finds that the largest banks have a cost advantage vis-à-vis their smaller peers. This cost advantage may not be entirely due to investors’ belief that the largest banks are “too big to fail” because the study also finds that the largest nonbanks, as well as the largest nonfinancial corporations, have a cost advantage relative to their smaller peers. However, a comparison across the three groups reveals that the largest banks have a relatively larger cost advantage vis-à-vis their smaller peers. This difference is consistent with the hypothesis that investors believe the largest banks are “too big to fail.”

Keywords: bond spreads, too-big-to-fail

JEL Classification: G21, G24

Suggested Citation

Santos, João A. C., Evidence from the Bond Market on Banks' 'Too-Big-To-Fail' Subsidy (March 31, 2014). Economic Policy Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2419682

João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

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