Podcast
Questions and Answers
Mergers between banks can lead to an increase in ______ market value.
Mergers between banks can lead to an increase in ______ market value.
stock
One consequence of becoming too-big-to-fail is earning a ______ as a result of mergers.
One consequence of becoming too-big-to-fail is earning a ______ as a result of mergers.
premium
The initial negative effect from mergers could arise from shareholders fearing ______ of the bank.
The initial negative effect from mergers could arise from shareholders fearing ______ of the bank.
nationalization
Studies add proxies of bank ______ as controls to analyze mergers.
Studies add proxies of bank ______ as controls to analyze mergers.
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Kane investigates a sample of ______ giant US banks between 1991 and 1998.
Kane investigates a sample of ______ giant US banks between 1991 and 1998.
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Flashcards
TBTF Subsidy
TBTF Subsidy
The financial advantage banks gain from being considered too-big-to-fail.
Mergers and Acquisitions (M&A)
Mergers and Acquisitions (M&A)
The process where two banks combine, impacting their market presence and risk perception.
Merger Premium
Merger Premium
The additional amount banks are willing to pay in a merger due to TBTF status.
Shareholder Value in M&A
Shareholder Value in M&A
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Risk Incentive
Risk Incentive
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Study Notes
Private Value of Too-Big-To-Fail Guarantees
- This study estimates the annual funding advantage for 151 large European banks from 2008-2012.
- The funding advantage is based on creditworthiness assessments by rating agencies with and without external support.
- The funding advantage is substantial and varies significantly over time.
- For most countries, the advantage rose from 0.1% of GDP in early 2008 to over 1% of GDP in mid-2011.
- Larger banks generally experienced higher rating uplifts, but this effect plateaued for banks with assets exceeding €1 trillion.
- A higher sovereign rating for a bank's home country correlated with a higher rating uplift.
Methodology
- The study uses the funding cost advantage approach, adapting methods from previous research.
- It analyzes bond data to determine the relationship between deposit ratings and bond yields.
- Credit ratings are used, taken with and without explicit/implicit external backing.
- The method calculates the difference in bond yields based on credit ratings, accounting for variation.
- The results are adjusted for variability in bond data (over time).
- The funding advantage is calculated as the daily yield reduction multiplied by outstanding debt.
- The study accounts for potential bias and uncertainty in estimates.
- The study also assesses the impact of bank country characteristics (and sovereign ratings).
Findings
- The study demonstrates that large banks enjoy considerable funding advantages related to too-big-to-fail policies.
- Funding advantages correlate with bank size and the strength of the home country's sovereign rating.
- Results are comparable to prior estimations.
- The funding advantage is substantial to the bank sector.
- Implicit subsidies amounted to around €1.29 trillion across the 2007-2010 period.
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Description
This quiz explores the annual funding advantages enjoyed by 151 large European banks from 2008 to 2012 due to their perceived creditworthiness. It highlights the significant variances over time and the correlation between sovereign ratings and bank credit uplifts. Test your understanding of the factors influencing funding rates and bank stability.
