Funding Advantage of Large European Banks 2008-2012

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.