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‘Too Systemically Important to Fail’ in Banking

Author

Listed:
  • Phil Molyneux

    (Bangor Business School)

  • Klaus Schaeck

    (Bangor Business School)

  • Tim Zhou

    (Bangor Business School)

Abstract

The recent financial turmoil and bailouts of a large number of banks have raised substantial policy concerns regarding banks that are considered ‘Too-systemically-important-to-fail’ (TSITF). In this paper, we exploit a sample of bank mergers and acquisitions (M&As) between 1997 and 2008 in nine EU economies and use an innovative setup derived from the frontier literature to capture safety net subsidy effects and evaluate their ramifications for systemic risk. We focus on three closely related phenomena: First, we use frontier methods to extract information on whether banks deliberately pay premiums for being considered TSITF. Second, we incorporate the safety net subsidies derived from the frontier methods in a probit model to assess whether they affect the probability of a bank being rescued during the recent crisis. We find that safety net benefits derived from M&A activity have a significantly positive association with the rescue probability, suggesting the moral hazard issue in banking systems pre-crisis. Third, we do not find that gaining safety net subsidies leads to TSITF bank’s increased interdependence on its peer banks. From a policy perspective, the findings help understand whether banks exploit national safety nets and increase instability in the financial system.

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  • Phil Molyneux & Klaus Schaeck & Tim Zhou, 2011. "‘Too Systemically Important to Fail’ in Banking," Working Papers 11011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    • Handle: RePEc:bng:wpaper:11011
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    2. Thomas Conlon & John Cotter, 2019. "Subordinate Resolution ‐‐ An Empirical Analysis of European Union Subsidiary Banks," Journal of Common Market Studies, Wiley Blackwell, vol. 57(4), pages 857-876, July.
    3. Conlon, Thomas & Cotter, John, 2014. "Anatomy of a bail-in," Journal of Financial Stability, Elsevier, vol. 15(C), pages 257-263.
    4. Avino, Davide E. & Conlon, Thomas & Cotter, John, 2019. "Credit default swaps as indicators of bank financial distress," Journal of International Money and Finance, Elsevier, vol. 94(C), pages 132-139.
    5. Dumitriu, Ramona & Stefanescu, Razvan & Nistor, Costel, 2012. "State - owned banks from Romania," MPRA Paper 52768, University Library of Munich, Germany, revised Jan 2013.

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    More about this item

    Keywords

    systemic importance; systemic risk; merger and acquisition; banking;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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