The Decline of Too Big to Fail
52 Pages Posted: 19 Dec 2019 Last revised: 28 Apr 2020
Date Written: April 28, 2020
For globally systemically important banks (G-SIBs) with U.S. headquarters, we find large post-Lehman reductions in market-implied probabilities of government bailout, along with big increases in debt financing costs for these banks after controlling for insolvency risk. The data are consistent with significant effectiveness for the official sector's post-Lehman G-SIB failure-resolution intentions, laws, and rules. G-SIB creditors now appear to expect to suffer much larger losses in the event that a G-SIB approaches insolvency. In this sense, we estimate a major decline of "too big to fail.''
Keywords: too big to fail, systemically important banks, government bailouts
JEL Classification: G12, G13, G22, G24
Suggested Citation: Suggested Citation