Western Commercial G-SIBs and the TBTF Mentality: Has the Designation Policy Been Effective to Make Global Banks Safer?

Abstract

In November 2011, the Financial Stability Board published the first list of systemically important financial institutions. The list was intended to counteract the Too-big-to-fail problem that compelled governments to pour taxpayers’ money on the banking system amid the last financial crisis. After six years of this regulatory framework, the list of global systemically important banks (G-SIBs) remains almost intact and scholars have started to question its effectiveness. It is intriguing to explore whether G-SIBs have gotten safer since 2011 or whether investors are cooperating by enforcing market discipline to curb banks’ risk-taking. Accordingly, the present study used financial indicators and bankruptcy scores to analyse banks’ health. It also applied the event-study methodology to detect how market discipline could have been affected by the request for the bailout of Banca Monte dei Paschi di Siena. To do so, a sample consisting of 14 publicly traded G-SIBs headquartered in Western countries and primarily focused on commercial banking was selected. The results of financial indicators and bankruptcy scores show little evidence to believe that banks have gotten significantly safer in the post-crisis period. The application of the event-study methodology insinuates that market discipline might have been eroded by the bailout of BMPS. After running OLS regressions to estimate the parameters of the normal-returns market model, evidence of abnormal returns for all G-SIBs was detected following the bailout request.

Keywords: Systemic risk, Too-big-to-fail, event study, regulatory reforms, global systemically important banks, abnormal returns, financial distress

JEL Classification: G01; G14; G21; G28; G32; G33