Evidence from the Bond Market on Banks' 'Too-Big-To-Fail' Subsidy

24 Pages Posted: 4 Apr 2014 Last revised: 1 Mar 2021

See all articles by João A. C. Santos

João A. C. Santos

Federal Reserve Bank of New York; Nova School of Business and Economics

Date Written: March 31, 2014

Abstract

Using information from bonds issued over the past twenty years, this study finds that the largest banks have a cost advantage vis-à-vis their smaller peers. This cost advantage may not be entirely due to investors’ belief that the largest banks are “too big to fail” because the study also finds that the largest nonbanks, as well as the largest nonfinancial corporations, have a cost advantage relative to their smaller peers. However, a comparison across the three groups reveals that the largest banks have a relatively larger cost advantage vis-à-vis their smaller peers. This difference is consistent with the hypothesis that investors believe the largest banks are “too big to fail.”

Keywords: bond spreads, too-big-to-fail

JEL Classification: G21, G24

Suggested Citation

Santos, João A. C., Evidence from the Bond Market on Banks' 'Too-Big-To-Fail' Subsidy (March 31, 2014). Economic Policy Review 20(2), 29-39, 2014., Available at SSRN: https://ssrn.com/abstract=2419682

João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045
United States
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HOME PAGE: http://HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

Nova School of Business and Economics ( email )

Campus de Carcavelos
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Carcavelos, 2775-405
Portugal

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