Too Tech to Fail?

49 Pages Posted: 21 Mar 2022 Last revised: 10 Jun 2022

See all articles by Nordine Abidi

Nordine Abidi

International Monetary Fund ; affiliation not provided to SSRN

Ixart Miquel-Flores

European Central Bank (ECB); Frankfurt School of Finance & Mangement.

Date Written: February 26, 2022

Abstract

Do the biggest tech companies have a bond funding edge? Are they the new "Too-Big-to-Fail" (TBTF)? TBTF represents, among other things, the idea that the biggest firms (usually banks) receive an unfair funding advantage over smaller ones in the bond market. By investigating the tech financial world, our empirical work reveals two important findings. First, within the universe of bond-issuing U.S. firms, the largest tech companies did experience a funding advantage – of about 30bps. on average – from 2014 to 2021. Our estimates suggest that the (implicit) subsidy is in the range of 1 to 2 USD billion per year and that this has been steadily rising over the last years, especially during the Covid-19 period. Second, using a unique dataset of security-level portfolio holdings by sector in each euro area country, we investigate portfolio choices during times of financial distress. We find evidence of a sharp relative increase in portfolio holdings of Big Tech securities during times of market turbulence suggesting that Big Tech bonds act as safe assets. Overall, while the magnitudes of our estimates remain small from a macroeconomic perspective, we find that Big Tech companies are slowly converging towards what we call the "Too-Tech-to-Fail" (TTTF) paradigm. In other words, the unique position they have in the new economy, seems to artificially boost their credit profiles and lower their bond funding costs, potentially creating an uneven playing field.

Keywords: Too Big to Fail, Too Tech to Fail, Big Tech, Systemic Risk, Moral Hazard

JEL Classification: G21, G24, G28

Suggested Citation

Abidi, Nordine and Miquel-Flores, Ixart, Too Tech to Fail? (February 26, 2022). Available at SSRN: https://ssrn.com/abstract=4044577 or http://dx.doi.org/10.2139/ssrn.4044577

Nordine Abidi

International Monetary Fund ( email )

700 19th Street, N.W.
Washington DC
United States

affiliation not provided to SSRN

Ixart Miquel-Flores (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstraße 20
Frankfurt am Main, 60325
Germany

Frankfurt School of Finance & Mangement. ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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