Search results

Despite a raft of important qualitative reservations and at best poor empirical evidence, the argument that, in case of business problems, large banks are more likely to be bailed out by government intervention than smaller banks (‘too big to fail’) cannot be dismissed entirely. The question, though, is whether or to what extent this has any implications for competition or the stability of the banking system. Under realistic assumptions, especially with respect to incentives for bank management and shareholders, too big to fail hardly leads to excessive risk taking by large banks. The impact of too big to fail on a bank's rating and, accordingly, its refinancing conditions is only marginal, as a breakdown of the various rating components clearly documents. This suggests that the effects on competition of too big to fail come nowhere close to the refinancing advantages enjoyed by public sector banks in Germany. The refinancing advantage of the Landesbanken afforded by state guarantees (Anstaltslast and Gewährtragerhäftung) comes to as much as 50 basis points. Given the continual narrowing of lending margins, an advantage on this scale plays a decisive role in competition. Too big to fail has substantial implications for the architecture of banking supervision. Suitable institutional arrangements need to be created in order to deal with large banks in case of a, potentially systemic, crisis. With banking becoming increasingly global and the number of cross‐border mergers on the rise, this requires solutions at an international, if not at a global, level. Implementing the concept of a European Liko‐Bank, as suggested by the Bundesbank, will require that the supervisory authorities and the European System of Central Banks (ESCB) first create appropriate public sector counterparts.

Purpose: This chapter explores some of the difficult issues in financial regulation for financial stability. Noting the lack of prior academic work in the topic, this chapter presents a discussion of some difficult issues in financial regulation for financial stability.

Methodology: The chapter draws from real-world experiences in financial regulation and draws support from existing literature.

Findings and conclusions: Some of the difficult issues include: the difficulty in breaking too-big-to-fail financial institutions into small insignificant parts; the difficulty in regulating executive compensation in the financial sector without limiting the ability of financial institutions to offer competitive pay for executive talent; difficulty in instilling strict financial regulation and supervision without limiting the ability of financial institutions to exploit emerging profitable opportunities; difficulty in ensuring that financial institutions increase lending in bad times and during recessions; the rarity of having both a female CEO and Chair in a major financial institution; difficulty in making Central Banks independent from the Federal Government; difficulty in making financial institutions relevant in the midst of hostile technological innovation and disruption.

Practical implications: The implication of the findings is that financial regulation for financial stability is not an easy task. There will be issues that financial regulation can address, and there will be issues that financial regulation cannot address. Acknowledging that such difficulties exist on the path to financial stability is the first step to addressing these issues.

This paper aims to highlight the shift of impunity from institutions to individuals within the “too big to fail, too big to jail” paradigm and to restore individual liability in the financial industry.

The paper is based on the analysis of HSBC deferred prosecution agreement concluded on December 10, 2012 and of a report by the US House of Representatives Financial Committee released in July 2016.

“Too big to fail, too big to jail” is a paradigm which contains justice. It leads to the impunity of individuals involved due to the absence of trial. Containment of justice is denial of justice. However, the systemic risk is attached to institutions, not to individuals. Therefore, it should not hamper the prosecution of individuals.

Setting sanctions applicable to individuals and proportionate to the crime would contribute to deter financial misconducts.

The value of the paper is the demonstration that there is no basis for a limited personal liability in the financial industry.

Outlines the US development of the “too‐big‐to‐fail” (TBTF) doctrine following the collapse of the Continental Illinois Bank, reviews relevant research and explores the impact on the efficiency of the banking system. Uses 1983‐1985 call report data, explains the methodology and presents the results, which analyse economies and diseconomies of scope and scale between different types of loans; and levels of inefficiency for TBTF and non‐TBTF banks. Shows that TBTF banks had the greatest increase in inefficiency following Continental’s failure but reduced this in the following year, as did small banks which did not benefit from complete depository coverage. Confirms that the TBTF doctrine increased stability for all banks, but particularly those covered by the doctrine.

The purpose of this paper is to examine the implicit subsidies received, in the form of stock market returns, from the perception that large banking organizations are too big to fail, and implications for financial regulation.

The empirical analysis focuses on the responses of stock prices of various size groups of banking organizations to announcement of government capital injections to banks (troubled assets relief program) during the 2008 financial crisis, and summarizes responses of regulatory authorities to the crisis.

The paper finds positive and statistically significant stock return reactions both for a portfolio of the large banking organizations that are part of the initial capital injection plan and a portfolio of the large banking organizations that are not part of the initial capital injection plan, implying a too‐big‐to‐fail (TBTF) effect, especially for the latter group of institutions.

The paper focuses on a short time frame of stock price reactions to specific events, for the largest US banks. Further examination of longer‐term stock price effects on US as well as foreign banks may be of interest.

The results have implications for the manner and scope of financial regulatory actions and changes in regulators' approaches to systemic risk and individual bank regulation.

The paper examines TBTF bank subsidy effects in response to a rapidly unfolding financial crisis. These have implications for longer term responses, particularly in the regulatory sphere.

This study empirically demonstrates a contradiction between pillar 3 of Basel norms III and the designation of Systemically Important Banks (SIBs), also known as Too Big to Fail (TBTF). The objective of this study is threefold, which has been approached in a phased manner. The first is to determine the systemic importance of the banks under study; second, to examine if market discipline exists at different levels of systemic importance of banks and lastly, to examine if the strength of market discipline varies at different levels of systemic importance.

This study is based on all the public and private sector banks operating in the Indian banking sector. The Gaussian Mixture Model algorithm has been utilized to classify banks into distinct levels of systemic importance. Thereafter, market discipline has been observed by analyzing depositors' sentiments toward banks' risk (CAMEL indicators). The analysis has been performed by employing the system Generalized Method of Moments (GMM) to estimate models with different dependent variables.

The findings affirm the existence of market discipline across all levels of systemic importance. However, the strength of market discipline varies with the systemic importance of the banks, with weak market discipline being a negative externality of the SIBs designation.

By employing the Gaussian Mixture Model algorithm to develop a framework for categorizing banks on the basis of their systemic importance, this study is the first to go beyond the conventional method as outlined by the Reserve Bank of India (RBI).

The purpose of this paper is to study the information content of about 3,300 global bank rating changes before and after the Lehman bankruptcy in September 2008 to assess if differences in stock market reactions for small and big banks emerge.

The analysis of the stock market reactions of rating changes (upgrades and downgrades) and bank’s size (small and big) is conducted by an event study approach.

The authors find that while upgrades are not associated with significant abnormal bank stock returns, downgrades have a significantly negative effect. This result holds for both small and big banks, while negative abnormal returns are considerably stronger for the former. For small banks, the authors observe an increase in negative cumulative abnormal returns post-Lehman. The lack of a reaction to large banks’ rating downgrades in the narrow [−1,+1] event window indicates that their stock prices may, to some extent, be insulated from negative rating information even post-Lehman, which the authors attribute to an implicit “too big to fail” subsidy anticipated by equity investors.

This paper provides insights to the differences in the information content of changes in small and big banks’ credit rating on stock returns that is unrelated to the well-known size effect. Compared to small banks, big banks seem to some extent be insulated from negative rating changes even post-Lehman – contributing to the on-going too big to fail debate.

The purpose of this paper is to investigate the effects of the 2008 SEC short‐sell moratorium on regional bank risk and return. The paper also examines the decline in “failures to deliver” securities in the wake of SEC short‐sell moratorium.

In total, six regional bank portfolios are derived and the beta coefficients from a CAPM model are estimated using the integrated generalized autoregressive conditional heteroskedasticity (IGARCH) method accounting for the short‐sell moratorium. Data on 110 regional banks in six US regions from January 2002 to December 30, 2011 are used to estimate the model.

The ban on naked short selling and the SEC short‐sell moratorium significantly increased individual bank risk for a majority of banks in six geographic regions, but also increased return in three of three regions. There was also reduced naked short selling as failures to deliver securities declined sharply after the September 2008 moratorium took effect.

Regional banks have generally not achieved the size needed to be deemed “too big to fail” by policy‐makers. Thus, policy changes such as the SEC short‐sell moratorium might be expected to have larger effects on regional banks than on larger banks, which might be shielded from the policy change by having achieved “too big to fail” status. The authors' results are consistent with research that has shown that short‐sell restrictions increase risk by reducing liquidity and trading volume.