Economic Policy Review
Evidence from the Bond Market on Banks’ “Too-Big-to-Fail” Subsidy
2014 Volume 20, Number 2
JEL classification: G21, G24
Using information on bonds issued over the 1985-2009 period, this study finds that the largest banks have a funding advantage over their smaller peers. This advantage may not be entirely attributable to investors’ belief that the largest banks are “too big to fail,” because the study also finds that the largest nonbanks, as well as the largest nonfinancial corporations, have a cost advantage relative to their smaller peers. However, a comparison across the three groups reveals that the funding advantage enjoyed by the largest banks is significantly larger than that available to the largest nonbanks and nonfinancial corporations. This difference is consistent with the hypothesis that investors believe the largest banks to be too big to fail.