Do Bond Spreads Show Evidence of Too Big to Fail Effects? Evidence from 2009-2013 Among Us Bank Holding Companies
27 Pages Posted: 11 Apr 2014
Date Written: April 10, 2014
Abstract
This study seeks to assess recent evidence on funding cost differentials among US Bank Holding Companies (BHCs), to better inform the debate about the future of financial reform in the US. Specifically, we measure differences in market spreads observed from 2009-2013 for senior unsecured bonds issued by US BHCs.
We find that in 2009, bonds issued by US Global Systemically Important Banks (G-SIBs) traded at spreads more than 100 basis points less than bonds issued by other US BHCs. Using more recent data than similar studies of bond spread differentials, we find that the sizeable G-SIBs funding differential of 2009 declines thereafter and becomes insignificant by 2013.
Overall, our results are consistent with the hypothesis that post-crisis policy changes in the US meant to address TBTF concerns have had a gradual but economically significant impact, especially in the last one to two years.
Keywords: financial institutions, too big to fail, TBTF, banking, bond spreads, interest rate, BHCs
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