The Perennial Challenge to Counter Too-Big-To-Fail in Banking: Empirical Evidence from the New International Regulation Dealing with Global Systemically Important Banks

50 Pages Posted: 22 May 2014 Last revised: 23 Jan 2015

See all articles by Sebastian C. Moenninghoff

Sebastian C. Moenninghoff

WHU - Otto Beisheim School of Management

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Axel Wieandt

WHU - Otto Beisheim School of Management

Date Written: January 22, 2015

Abstract

This paper provides evidence on how the new international regulation on Global Systemically Important Banks (G-SIBs) impacts the market value of large banks. We analyze the stock price reactions for the 300 largest banks from 52 countries across 12 relevant regulatory announcement and designation events. We observe that the new regulation negatively affects the value of the newly regulated banks, yet that the official designation of banks as “globally systemically important” itself has a partly offsetting positive impact. A cross-sectional analysis of the valuation effects with respect to, for example, government ownership of banks supports the view that the positive reaction to these designations can be attributed to a Too-Big-to-Fail (TBTF) perception by investors. The fact that these valuation effects emerge from a regulation specifically designed to reduce the costs and risks of Too-Big-to-Fail demonstrates the inherently paradoxical nature of the new regulation. These results further suggest that even though the individual components of the regulation have been effective, revealing the identities of G-SIBs eliminated ambiguity about the presence of government guarantees, and thereby may have run counter to the regulators’ intent to contain the effects of TBTF.

Keywords: TBTF, Too Big to Fail, G-SIB, Global Systemically Important Bank, Bank Regulation, Unintended Consequences

JEL Classification: G20, G21, G24, G28

Suggested Citation

Moenninghoff, Sebastian Christoph and Ongena, Steven R. G. and Wieandt, Axel, The Perennial Challenge to Counter Too-Big-To-Fail in Banking: Empirical Evidence from the New International Regulation Dealing with Global Systemically Important Banks (January 22, 2015). Swiss Finance Institute Research Paper No. 14-33. Available at SSRN: https://ssrn.com/abstract=2440613 or http://dx.doi.org/10.2139/ssrn.2440613

Sebastian Christoph Moenninghoff (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Axel Wieandt

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
523
Abstract Views
3,916
rank
51,394
PlumX Metrics