What's the Value of a TBTF Guaranty? Evidence from the G-SIFI Designation for Insurance Companies

Abstract

In July 2013, the Financial Stability Board classified nine global insurance firms as Global Systemically Important Financial Institutions (G-SIFI). From the AIG bailout in 2008 through this announcement, we document average abnormal stock returns of 9.6% for the designated firms. These equity gains are not associated with a drop in expected default probabilities, but are associated with a wealth transfer from creditors and an expectation of increased asset risk. Over the same event window, the stock prices, CDS spreads, bond and options prices for other large insurance firms show no significant changes on average.

Keywords: Insurance, Too big to fail, Systemically important financial institutions

JEL Classification: G22, G23, G28