Are the Borrowing Costs of Large Financial Firms Unusual?

59 Pages Posted: 1 Oct 2014 Last revised: 31 Jul 2015

See all articles by Javed Ahmed

Javed Ahmed

Metis

Christopher Anderson

Board of Governors of the Federal Reserve System

Rebecca Zarutskie

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: May 23, 2015

Abstract

Government guarantees are often offered as an explanation for why large financial firms borrow more cheaply than small financial firms. However large firms generally borrow more cheaply across a wide range of non-financial industries. We show that the difference in borrowing costs between large and small financial firms is not unusual compared to other industries. These size-related differences are present after controlling for default risk and are only partially explained by higher liquidity and recovery rates for larger borrowers. Our results suggest that estimates of implicit government guarantees based on size-related borrowing cost differentials for financial firms may be overstated. However our analysis also finds that in the period leading up to the 2008-9 financial crisis, borrowing costs were lower for the financial industry as a whole. This result is consistent with an implicit government guarantee, or generally reduced investor risk perceptions, lowering borrowing costs for the entire financial industry rather than specifically for the largest financial institutions.

Keywords: Financial industry, too-big-to-fail, implicit government guarantee, size effect, borrowing costs, credit default swaps

JEL Classification: G21, G22, G24, G28

Suggested Citation

Ahmed, Javed and Anderson, Christopher and Zarutskie, Rebecca, Are the Borrowing Costs of Large Financial Firms Unusual? (May 23, 2015). Available at SSRN: https://ssrn.com/abstract=2503644 or http://dx.doi.org/10.2139/ssrn.2503644

Javed Ahmed

Metis ( email )

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HOME PAGE: http://https://www.linkedin.com/in/javediahmed/

Christopher Anderson

Board of Governors of the Federal Reserve System ( email )

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Rebecca Zarutskie (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Mailstop 155-B
Washington, DC 20551
United States
202-452-5292 (Phone)

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