When Enough Is Not Enough: Bank Capital and the Too-Big-To-Fail Subsidy

64 Pages Posted: 15 Jun 2017 Last revised: 19 Jun 2019

See all articles by Michael B. Imerman

Michael B. Imerman

Claremont Colleges - Peter F. Drucker Graduate School of Management

Date Written: January 31, 2019

Abstract

This paper takes a unique approach to study the relationship between bank capital and Too-Big-To-Fail (TBTF) during the Financial Crisis. A structural credit risk model is used to compute implied market value capital ratios which, when compared to traditional risk-based capital, illustrates the capital deficiency of large BHCs. As these BHCs' implied capital deteriorated, their default probabilities spiked. The model is then used to solve for the amount of capital needed to reduce default probabilities. This amount is compared to the TARP capital infusions to quantify the TBTF subsidy which is associated with size and reliance on short-term volatile funding.

Keywords: Bank Capital, Too-Big-To-Fail, TARP, Structural Credit Risk Model, Bank Default Probability

JEL Classification: G01, G21, G28, G32

Suggested Citation

Imerman, Michael B., When Enough Is Not Enough: Bank Capital and the Too-Big-To-Fail Subsidy (January 31, 2019). Available at SSRN: https://ssrn.com/abstract=2986460 or http://dx.doi.org/10.2139/ssrn.2986460

Michael B. Imerman (Contact Author)

Claremont Colleges - Peter F. Drucker Graduate School of Management ( email )

The Drucker School of Management
1021 North Dartmouth Avenue
Claremont, CA 91711
United States
909-607-3310 (Phone)

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