The size anomaly in European financial stock returns

Large financial institutions in Europe earn significantly lower risk-adjusted returns than their smaller counterparts. This pattern is absent in other industries. We interpret this as evidence of the latent government guarantees that protect large European financial institutions from tail events. Panel regressions suggest that unconditional on distress, the expected guarantees increase with size, leverage, and the government debt-to-GDP ratio. These determinants can be associated with a higher likelihood of being involved in a systemic crisis and thus receiving more government guarantees.