Are the Largest Banks Valued More Highly?
Charles A. Dice Center Working Paper No. 2018-12
67 Pages Posted: 13 Jul 2018
Date Written: July 12, 2018
Some argue too-big-to-fail (TBTF) status increases the value of the largest banks. In contrast, we find that the value of the largest banks is negatively related to asset size in normal times, but not during the financial crisis when TBTF status was most valuable. Further, shareholders lose when large banks cross a TBTF threshold through acquisitions. The negative relation between bank value and bank size for the largest banks cannot be explained by differences in ROA, ROE, equity volatility, tail risk, distress risk, or equity discount rates, but it can be partly explained by the market’s discounting of trading activities.
Keywords: Size and Bank Value, Bank Performance, Too-Big-To-Fail (TBTF), TBTF Subsidy, Trading Assets
JEL Classification: G2, G21, G28, G3
Suggested Citation: Suggested Citation