Safety-Net Benefits Conferred on Difficult-to-Fail-and-Unwind Banks in the US and EU Before and During the Great Recession
This paper models and estimates ex ante safety-net benefits at a sample of large banks in US and Europe during 2003-2008. Our results suggest that difficult-to-fail and unwind (DFU) banks enjoyed substantially higher ex ante benefits than other institutions. Safety-net benefits prove significantly larger for DFU firms in Europe and bailout decisions less driven by asset size than in the US. We also find that a proxy for regulatory capture helps to explain bailout decisions in Europe. A policy implication of our findings is that authorities could better contain safety-net benefits if they refocused their information systems on measuring volatility as well as capital.
The authors thank the Fundación de las Cajas de Ahorros (Funcas) for supporting this research. We also thank James Wilcox, Robert Eisenbeis and other participants in the 2011 ASSA meetings and from Marianne Verdier and other participants in the seminar held at the Université Paris Ouest-Nanterre la Défense in January 2011. Comments from Ethan Cohen-Cole, Robert Dickler, Stephen Kane, and James Thomson are also acknowledged and appreciated. Santiago Carbó and Francisco Rodriguez acknowledge financial support from the Spanish Ministry of Science and Innovation and FEDER (ECO2008- 05243/ECON) and from the Consejería de Innovación, Ciencia y Empresa-Junta de Andalucía (P08-SEJ- 03781). Kane is grateful for support received on a related project from the Institute for New Economic Thinking. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Santiago Carbo-Valverde & Edward J. Kane & Francisco Rodriquez-Fernandez, 2011. "Safety-net benefits conferred on difficulty-to-fail-and-unwind banks in the U.S. and EU before and during the Great Recession," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 327-332.
CarbÃ³-Valverde, Santiago & Kane, Edward J. & Rodriguez-Fernandez, Francisco, 2013. "Safety-net benefits conferred on difficult-to-fail-and-unwind banks in the US and EU before and during the great recession," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1845-1859. citation courtesy of