The Decline of Too Big to Fail
82 Pages Posted: 19 Dec 2019 Last revised: 15 Mar 2021
Date Written: March 12, 2021
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
Suggested Citation: Suggested Citation