Evidence from the Bond Market on Banks' 'Too-Big-To-Fail' Subsidy
24 Pages Posted: 4 Apr 2014 Last revised: 1 Mar 2021
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: Suggested Citation