The Decline of Too Big to Fail

Abstract

For globally systemically important banks (GSIBs) with U.S. headquarters, we find significant post-Lehman reductions in market-implied probabilities of government bailout, along with 50%-to-100% 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-Lehman GSIB failure-resolution intentions, laws, and rules. GSIB creditors now appear to expect to suffer 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