The Decline of Too Big to Fail

Abstract

For globally systemically important banks (GSIBs) with US head- quarters, we find significant reductions in market-implied prob- abilities of government bailout after the Global Financial Crisis (GFC), along with roughly 170% higher wholesale debt financing costs for these banks after controlling for insolvency risk. The data are consistent with measurable effectiveness for the official sector’s post-GFC GSIB failure-resolution intentions. GSIB creditors now appear to expect much larger losses in the event that a GSIB 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, G21, G28