Does banks size distort market prices? Evidence for too-big-to-fail in the CDS market

Arbeitspapier

This paper examines the potential distortion of prices in the CDS market caused by too-big-to-fail. Overall, we find evidence for market discipline in the CDS market. However, CDS prices are distorted due to a size effect which arises when investors expect a public bail-out as a result of too-big-to-fail. A one percentage point increase in size reduces the CDS spread of a bank by about two basis points. We further find that some banks have already reached a size that makes them too-big-to-be-rescued. While the price distortion for these banks decreases the existence of banks that are considered to be toobig-to-rescue raises important new issues for banking supervisors.

Object Details

• ISBN: 978-3-86558-505-9
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper Series 2 ; No. 2009,06

Classification and Topics

• Classification: Wirtschaft ; Information and Market Efficiency; Event Studies; Insider Trading ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Market Discipline ; Too Big To Fail ; Too Big to Rescue CDS Spreads ; Bank ; Betriebsgröße ; Credit Default Swap ; Kreditversicherung ; Börsenkurs ; Risikoprämie ; Bankinsolvenz ; Bankgarantie ; Staatliche Einflussnahme ; Welt

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Völz, Manja ; Wedow, Michael
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/27689
• Last update: 10.03.2025, 11:42 AM CET