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Are too-big-to-fail banks history in Europe? Evidence from overnight interbank loans

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  • Tölö, Eero
  • Jokivuolle, Esa
  • Virén, Matti

Abstract

We investigate how European banks' overnight borrowing costs depend on bank size. We use the Eurosystem's proprietary interbank daily loan data on euro-denominated transactions from 2008-2014. We find that large banks have had a clear borrowing cost advantage over small banks and that this premium increases progressively with the size of the bank. This result is robust with respect to subsamples, subperiods, time aggregation, and control variables such as Tier 1 capital ratio and rating. During episodes of financial stress, the size advantage becomes several times larger. However, we also find evidence that the new recovery and resolution framework for banks may have slightly reduced the borrowing cost advantage of larger banks in Europe.

Suggested Citation

  • Tölö, Eero & Jokivuolle, Esa & Virén, Matti, 2015. "Are too-big-to-fail banks history in Europe? Evidence from overnight interbank loans," Bank of Finland Research Discussion Papers 29/2015, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2015_029
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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