Staff Reports
Resolving “Too Big to Fail”
Number 859
June 2018

JEL classification: G21, G28

Authors: Nicola Cetorelli and James Traina

Using a synthetic control research design, we find that “living will” regulation increases a bank’s annual cost of capital by 22 basis points, or 10 percent of total funding costs. This effect is stronger in banks that were measured as systemically important before the regulation’s announcement. We interpret our findings as a reduction in “too big to fail” subsidies. The size of this effect is large: a back-of-the-envelope calculation implies a subsidy reduction of $42 billion annually. The impact on equity costs drives the main effect. The impact on deposit costs is statistically indistinguishable from zero, representing a good placebo test for our empirical strategy.

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AUTHOR DISCLOSURE STATEMENT(S)
Nicola Cetorelli
I declare that I have no relevant or material financial interests that relate to the research described in this paper.

James Traina
I declare that I have no relevant or material financial interests that relate to the research described in this paper.