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The Perennial Challenge to Counter Too-Big-To-Fail in Banking: Empirical Evidence from the New International Regulation Dealing with Global Systemically Important Banks

Author

Listed:
  • Sebastian C. MOENNINGHOFF

    (WHU - Otto Beisheim School of Management)

  • Steven ONGENA

    (University of Zurich)

  • Axel WIEANDT

    (WHU - Otto Beisheim School of Management)

Abstract
This paper provides evidence on how the new international regulation on Global Systemically Important Banks (G-SIBs) impacts the market value of large banks. We analyze the stock price reactions for the 300 largest banks from 52 countries across 12 relevant regulatory announcement and designation events. We observe that the new regulation negatively affects the value of the newly regulated banks, yet that the official designation of banks as “globally systemically important” itself has a partly offsetting positive impact. A cross-sectional analysis of the valuation effects with respect to, for example, government ownership of banks supports the view that the positive reaction to these designations can be attributed to a Too-Big-to-Fail (TBTF) perception by investors. The fact that these valuation effects emerge from a regulation specifically designed to reduce the costs and risks of Too-Big-to-Fail demonstrates the inherently paradoxical nature of the new regulation. These results further suggest that even though the individual components of the regulation have been effective, revealing the identities of G-SIBs eliminated ambiguity about the presence of government guarantees, and thereby may have run counter to the regulators’ intent to contain the effects of TBTF.

Suggested Citation

  • Sebastian C. MOENNINGHOFF & Steven ONGENA & Axel WIEANDT, 2014. "The Perennial Challenge to Counter Too-Big-To-Fail in Banking: Empirical Evidence from the New International Regulation Dealing with Global Systemically Important Banks," Swiss Finance Institute Research Paper Series 14-33, Swiss Finance Institute, revised Jan 2015.
    • Handle: RePEc:chf:rpseri:rp1433
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    More about this item

    Keywords

    TBTF; Too Big to Fail; G-SIB; Global Systemically Important Bank; Bank Regulation; Unintended Consequences;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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