Are Banks Too Big to Fail or Too Big to Save? International Evidence from Equity Prices and CDS Spreads

A. Demirgüc-Kunt, H.P. Huizinga

Research output: Working paperDiscussion paperOther research output

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Abstract

Deteriorating public finances around the world raise doubts about countries’ abilities to bail out their largest banks. For an international sample of banks, this paper investigates the impact of government indebtedness and deficits on bank stock prices and CDS spreads. Overall, bank stock prices reflect a negative capitalization of government debt and they respond negatively to deficits. We present evidence that in 2008 systemically large banks saw a reduction in their market valuation in countries running large fiscal deficits. Furthermore, the change in bank CDS spreads in 2008 relative to 2007 reflects countries’ deterioration of public deficits. Our results suggest that some systemically important banks can increase their value by downsizing or splitting up, as they have become too big to save, potentially reversing the trend to ever larger banks. We also document that a smaller proportion of banks are systemically important - relative to GDP - in 2008 than in the two previous years, which could reflect these private incentives to downsize.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages52
Volume2010-59
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-59

Fingerprint

Too big to fail
Equity prices
Credit default swap (CDS) spreads
Stock prices
Capitalization
Bailout
Indebtedness
Deterioration
Downsizing
Public finance
Incentives
Government
Public deficit
Proportion
Fiscal deficit
Government debt
Market valuation

Keywords

  • Banking
  • Financial crisis
  • Credit default swap
  • Too big to fail
  • Too big to save

Cite this

Demirgüc-Kunt, A., & Huizinga, H. P. (2010). Are Banks Too Big to Fail or Too Big to Save? International Evidence from Equity Prices and CDS Spreads. (CentER Discussion Paper; Vol. 2010-59). Tilburg: Finance.
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abstract = "Deteriorating public finances around the world raise doubts about countries’ abilities to bail out their largest banks. For an international sample of banks, this paper investigates the impact of government indebtedness and deficits on bank stock prices and CDS spreads. Overall, bank stock prices reflect a negative capitalization of government debt and they respond negatively to deficits. We present evidence that in 2008 systemically large banks saw a reduction in their market valuation in countries running large fiscal deficits. Furthermore, the change in bank CDS spreads in 2008 relative to 2007 reflects countries’ deterioration of public deficits. Our results suggest that some systemically important banks can increase their value by downsizing or splitting up, as they have become too big to save, potentially reversing the trend to ever larger banks. We also document that a smaller proportion of banks are systemically important - relative to GDP - in 2008 than in the two previous years, which could reflect these private incentives to downsize.",
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Demirgüc-Kunt, A & Huizinga, HP 2010 'Are Banks Too Big to Fail or Too Big to Save? International Evidence from Equity Prices and CDS Spreads' CentER Discussion Paper, vol. 2010-59, Finance, Tilburg.

Are Banks Too Big to Fail or Too Big to Save? International Evidence from Equity Prices and CDS Spreads. / Demirgüc-Kunt, A.; Huizinga, H.P.

Tilburg : Finance, 2010. (CentER Discussion Paper; Vol. 2010-59).

Research output: Working paperDiscussion paperOther research output

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T1 - Are Banks Too Big to Fail or Too Big to Save? International Evidence from Equity Prices and CDS Spreads

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AU - Huizinga, H.P.

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AB - Deteriorating public finances around the world raise doubts about countries’ abilities to bail out their largest banks. For an international sample of banks, this paper investigates the impact of government indebtedness and deficits on bank stock prices and CDS spreads. Overall, bank stock prices reflect a negative capitalization of government debt and they respond negatively to deficits. We present evidence that in 2008 systemically large banks saw a reduction in their market valuation in countries running large fiscal deficits. Furthermore, the change in bank CDS spreads in 2008 relative to 2007 reflects countries’ deterioration of public deficits. Our results suggest that some systemically important banks can increase their value by downsizing or splitting up, as they have become too big to save, potentially reversing the trend to ever larger banks. We also document that a smaller proportion of banks are systemically important - relative to GDP - in 2008 than in the two previous years, which could reflect these private incentives to downsize.

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KW - Credit default swap

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KW - Too big to save

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