Whose Credit Line is it Anyway: An Update on Banks' Implicit Subsidies

28 Pages Posted: 16 Dec 2016

See all articles by Tryggvi Gudmundsson

Tryggvi Gudmundsson

University of Cambridge - Christ's College

Date Written: November 2016


The post-crisis financial sector framework reform remains incomplete. While capital and liquidity requirements have been strengthened, doubts remain over other aspects, including the fact that expectations of government support for systemically-important banks (SIBs) remain intact. In this paper, we use a jump diffusion option-pricing approach to provide estimates of implicit subsidies gained by these banks due to the expectation of protection to creditors provided by governments. While these subsidies have declined in the post-crisis era as volatility has declined and capital levels have increased, they remain non-trivial. Even conservative parameterizations of default and loss probabilities lead to macroeconomically significant figures.

Keywords: Banks, Subsidies, Systemically important financial institutions, Capital requirements, Econometric models, Implicit subsidies, systemically-important banks, capital regulation

JEL Classification: G13, G21, G28, H20

Suggested Citation

Gudmundsson, Tryggvi, Whose Credit Line is it Anyway: An Update on Banks' Implicit Subsidies (November 2016). IMF Working Paper No. 16/224, Available at SSRN: https://ssrn.com/abstract=2886392

Tryggvi Gudmundsson (Contact Author)

University of Cambridge - Christ's College ( email )

St Andrew's Street
Cambridge, CB2 3BU
United Kingdom

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