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Resolving “Too Big to Fail”

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  • Nicola Cetorelli

    (Federal Reserve Bank of New York)

  • James Traina

    (University of Chicago)

Abstract

Using a synthetic control research design, we find that living will regulation increases a bank’s annual cost of capital by 22 bps, or 10% of total funding costs. This effect is stronger in banks measured as systemically important before the regulation’s announcement. We interpret our findings as a reduction in Too-Big-to-Fail subsidies. The effect size is large: multiplying our bank-specific point estimates by funding size implies a subsidy reduction of $42B annually. The impact on equity drives the main effect. The impact on deposits is statistically indistinguishable from zero, passing the placebo test for our empirical strategy.

Suggested Citation

  • Nicola Cetorelli & James Traina, 2021. "Resolving “Too Big to Fail”," Journal of Financial Services Research, Springer;Western Finance Association, vol. 60(1), pages 1-23, August.
    • Handle: RePEc:kap:jfsres:v:60:y:2021:i:1:d:10.1007_s10693-021-00352-1
    DOI: 10.1007/s10693-021-00352-1
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    More about this item

    Keywords

    Cost of capital; Time consistency; Too big to fail; Resolution plans; Dodd-Frank;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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