Too Big to Fail after All These Years

30 Pages Posted: 4 Oct 2005

See all articles by Donald P. Morgan

Donald P. Morgan

Federal Reserve Bank of New York

Kevin J. Stiroh

Federal Reserve Bank of New York

Date Written: September 2005

Abstract

The naming of eleven banks as "too big to fail (TBTF)" in 1984 led bond raters to raise their ratings on new bond issues of TBTF banks about a notch relative to those of other, unnamed banks. The relationship between bond spreads and ratings for the TBTF banks tended to flatten after that event, suggesting that investors were even more optimistic than raters about the probability of support for those banks. The spread-rating relationship in the 1990s remained flatter for TBTF banks (or their descendants) even after the passage of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), suggesting that investors still see those banks as TBTF. Until investors are disabused of such beliefs, investor discipline of big banks will be less than complete.

Keywords: market discipline, too big to fail

JEL Classification: G2, G3, N2

Suggested Citation

Morgan, Donald P. and Stiroh, Kevin J., Too Big to Fail after All These Years (September 2005). FRB of NY Staff Report No. 220. Available at SSRN: https://ssrn.com/abstract=813967 or http://dx.doi.org/10.2139/ssrn.813967

Donald P. Morgan (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
Research Department
New York, NY 10045
United States
212-720-6573 (Phone)

Kevin J. Stiroh

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6633 (Phone)
(212) 720-8363 (Fax)

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