Showing results 1 to 6 of approximately 6.(refine search)
Resolving “Too Big to Fail”
Using a synthetic control research design, we find that ?living will? regulation increases a bank?s annual cost of capital by 22 basis points, or 10 percent of total funding costs. This effect is stronger in banks that were measured as systemically important before the regulation?s announcement. We interpret our findings as a reduction in ?too big to fail? subsidies. The size of this effect is large: a back-of-the-envelope calculation implies a subsidy reduction of $42 billion annually. The impact on equity costs drives the main effect. The impact on deposit costs is statistically indistinguishable from zero, representing a good placebo test for our empirical strategy.
AUTHORS: Cetorelli, Nicola; Traina, James
Evolution in Bank Complexity
In yesterday?s post, our colleagues discussed the historic changes in financial sector size. Here, we tackle a related question on dynamics?how has bank complexity evolved through time? Recently, academics and policymakers have proposed a variety of strong actions to curb bank complexity, stemming from the view that complex banks are undesirable. While the large banks of today are certainly complex, we lack a thorough understanding of how they got that way. In this post and in our related contribution to the Economic Policy Review (EPR) volume, we focus on organizational complexity, measured by the number and types of entities organized together under common ownership and control. Using a new data set of financial-sector acquisitions, we study the structural evolution of banks and its implications for policy. We argue that banks grew into increasingly complex conglomerates in adaptation to a changing financial sector.
AUTHORS: McAndrews, James J.; Cetorelli, Nicola; Traina, James
Do “Too-Big-To-Fail” Banks Take On More Risk?
In the previous post, Joo Santos showed that the largest banks benefit from a bigger discount in the bond market relative to the largest nonbank financial and nonfinancial issuers. Today?s post approaches a complementary Too-Big-to-Fail (TBTF) question?do banks take on more risk if they?re likely to receive government support? Historically, commentators have expressed concerns that TBTF status encourages banks to engage in risky behavior. However, empirical evidence to substantiate these concerns thus far has been sparse. Using new ratings from Fitch, we tackle this question by examining how changes in the perceived likelihood of government support affect bank lending policies.
AUTHORS: Traina, James; Santos, Joao A. C.; Afonso, Gara M.
Evolution in bank complexity
This study documents the changing organizational complexity of bank holding companies as gauged by the number and types of subsidiaries. Using comprehensive data on U.S. financial acquisitions over the past thirty years, the authors track the process of consolidation and diversification, finding that banks not only grew in size, but also incorporated subsidiaries that span the entire spectrum of business activities within the financial sector. Their analysis shows that bank holding companies added banks to their firms in the early 1990s, but gradually expanded into nonbank intermediation through acquisitions of already?formed subsidiaries in the years following. They view this emergence as consistent with a move toward a model of finance oriented to securitization, and consider the implications of this new complexity for supervision and resolution.
AUTHORS: McAndrews, James J.; Traina, James; Cetorelli, Nicola
Do \\"Too-Big-to-Fail\\" banks take on more risk?
The notion that some banks are ?too big to fail? builds on the premise that governments will offer support to avoid the adverse consequences of disorderly bank failures. However, this promise of support comes at a cost: Large, complex, or interconnected banks might take on more risk if they expect future rescues. This article studies the effect of potential government support on banks? appetite for risk. Using balance-sheet data for 224 banks in forty-five countries starting in March 2007, the authors find higher levels of impaired loans after an increase in government support. To measure support, they rely on Fitch Ratings? support rating floors (SRFs), a new rating that isolates potential sovereign support from other sources of external support. A one-notch rise in the SRF is found to increase the impaired loan ratio by roughly 0.2?an 8 percent increase for the average bank. The authors obtain similar results when they assess the effect of increased support on net charge-offs and when they narrow their sample to U.S. banks only.
AUTHORS: Santos, Joao A. C.; Afonso, Gara M.; Traina, James
Resolving \\"Too Big to Fail\\"
Many market participants believe that large financial institutions enjoy an implicit guarantee that the government will step in to rescue them from potential failure. These ?Too Big to Fail? (TBTF) issues became particularly salient during the 2008 crisis. From the government?s perspective, rescuing these financial institutions can be important to avoid harm to the financial system. The bailouts also artificially lower the risk borne by investors and the financing costs of big banks. The Dodd-Frank Act attempts to remove the incentive for governments to bail out banks in the first place by mandating that each large bank file a ?living will? that details its strategy for a rapid and orderly resolution in the event of material distress or failure without disrupting the broader economy. In our recent New York Fed staff report, we look at whether living wills are effective at reducing the cost of implicit TBTF bailout subsidies.
AUTHORS: Traina, James; Cetorelli, Nicola