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

50 Pages Posted: 11 Jan 2015 Last revised: 19 Jan 2017

See all articles by Kathryn L. Dewenter

Kathryn L. Dewenter

University of Washington - Michael G. Foster School of Business

Leigh A. Riddick

American University - Kogod School of Business

Date Written: December 30, 2016

Abstract

We document median abnormal stock returns of 12% (U.S. $17.2 billion) for international insurance firms designated as Global Systemically Important Insurers (G-SII). These gains are associated with a fall in default probabilities, an increase in expected asset risk and an insignificant loss to creditors. Abnormal price responses for the G-SII show significant cross correlations with measures of firm risk and with country-level measures of regulatory quality. Over the same event window, identical measures for other large insurance firms show no significant average change. These results suggest that TBTF policies improve financial stability by lowering risk for the largest and riskiest firms, but the protection still comes at some cost, despite an emphasis in current policies on curtailing the moral hazard effects of protection.

Keywords: Insurance, Too big to fail (TBTF), Systemically important financial institutions (SIFI)

JEL Classification: G22, G23, G28

Suggested Citation

Dewenter, Kathryn L. and Riddick, Leigh A., What's the Value of a TBTF Guaranty? Evidence from the G-SII Designation for Insurance Companies (December 30, 2016). Available at SSRN: https://ssrn.com/abstract=2547723 or http://dx.doi.org/10.2139/ssrn.2547723

Kathryn L. Dewenter (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Dept. of Finance & Business Economics
Seattle, WA 98195-3200
United States
206-685-7893 (Phone)
206-685-9392 (Fax)

Leigh A. Riddick

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
202.885.1944 (Phone)

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