Report

Resolving “Too Big to Fail”


Abstract: 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.

Keywords: Dodd-Frank; resolution plans; too big to fail; cost of capital; time consistency;

JEL Classification: G28; G21;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2018-06-01

Number: 859

Pages: 28 pages