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When enough is not enough: bank capital and the Too-Big-To-Fail subsidy

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  • Michael B. Imerman

    (Claremont Graduate University)

Abstract

This paper takes a unique approach to study the relationship between bank capital and Too-Big-To-Fail (TBTF) during the Financial Crisis. A structural credit risk model is used to compute implied market value capital ratios which, when compared to traditional risk-based capital, illustrates the capital deficiency of large BHCs. As these BHCs’ implied capital deteriorated, their default probabilities spiked. The model is then used to solve for the amount of capital needed to reduce default probabilities. This amount is compared to the TARP capital infusions to quantify the TBTF subsidy which is associated with size and reliance on short-term volatile funding.

Suggested Citation

  • Michael B. Imerman, 2020. "When enough is not enough: bank capital and the Too-Big-To-Fail subsidy," Review of Quantitative Finance and Accounting, Springer, vol. 55(4), pages 1371-1406, November.
    • Handle: RePEc:kap:rqfnac:v:55:y:2020:i:4:d:10.1007_s11156-020-00877-x
    DOI: 10.1007/s11156-020-00877-x
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    More about this item

    Keywords

    Bank capital; Too-Big-To-Fail; TARP; Structural credit risk model; Bank default probability;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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