The Decline of Too Big to Fail

82 Pages Posted: 19 Dec 2019 Last revised: 15 Mar 2021

See all articles by Antje Berndt

Antje Berndt

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Yichao Zhu

Australian National University (ANU), Research school of Finance, Actuarial Studies and Applied Statistics

Date Written: March 12, 2021

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

Suggested Citation

Berndt, Antje and Duffie, James Darrell and Zhu, Yichao, The Decline of Too Big to Fail (March 12, 2021). Available at SSRN: https://ssrn.com/abstract=3497897 or http://dx.doi.org/10.2139/ssrn.3497897

Antje Berndt (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics ( email )

Canberra, ACT 0200
Australia

HOME PAGE: http://www.cbe.anu.edu.au/about/staff-directory/?profile=Antje-Berndt

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

655 Knight Way
Knight Management Center
Stanford, CA 94305-7298
United States
650-723-1976 (Phone)
650-725-8916 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yichao Zhu

Australian National University (ANU), Research school of Finance, Actuarial Studies and Applied Statistics ( email )

Kingsley Street
Acton
Australia

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