Resolving 'Too Big to Fail'

28 Pages Posted: 20 Jun 2018

See all articles by Nicola Cetorelli

Nicola Cetorelli

Federal Reserve Bank of New York

James Traina

University of Chicago

Date Written: June , 2018

Abstract

Using a synthetic control research design, we find that “living will” regulation increases a bank’s annual cost of capital by 22 basis points, or 10 percent of total funding costs. This effect is stronger in banks that were measured as systemically important before the regulation’s announcement. We interpret our findings as a reduction in “too big to fail” subsidies. The size of this effect is large: a back-of-the-envelope calculation implies a subsidy reduction of $42 billion annually. The impact on equity costs drives the main effect. The impact on deposit costs is statistically indistinguishable from zero, representing a good placebo test for our empirical strategy.

Keywords: cost of capital, time consistency, too big to fail, resolution plans, Dodd-Frank

JEL Classification: G21, G28

Suggested Citation

Cetorelli, Nicola and Traina, James, Resolving 'Too Big to Fail' (June , 2018). FRB of New York Staff Report No. 859, Available at SSRN: https://ssrn.com/abstract=3200044 or http://dx.doi.org/10.2139/ssrn.3200044

Nicola Cetorelli (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5071 (Phone)
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HOME PAGE: http://nyfedeconomists.org/cetorelli/

James Traina

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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