Safety-Net Benefits Conferred on Difficult-to-Fail-And-Unwind Banks in the US and EU Before and During the Great Recession

Edward J. Kane, Santiago Carbo-Valverde, Francisco Rodriguez Fernandez
2011 Social Science Research Network  
In this paper we model and estimate ex ante safety-net benefits at a sample of large banks in US and Europe during 2003-2008. Our results suggest that difficult-to-fail and unwind (DFU) banks enjoyed substantially higher ex ante benefits than other institutions. Safety-net benefits prove significantly larger for DFU firms in Europe and bailout decisions less driven by asset size than in the US. We also find that a proxy for regulatory capture helps to explain bailout decisions in Europe. A
more » ... s in Europe. A policy implication of our findings is that authorities could better contain safety-net benefits if they refocused their information systems on measuring volatility as well as capital.
doi:10.2139/ssrn.1884131 fatcat:s243socfkbdjrk67iiyhgub7cq