Financial Stability Paper No. 32
By Caspar Siegert and Matthew Willison
How big is the ‘too big to fail’ (TBTF) problem? Different approaches have been developed to estimate the impact being perceived as TBTF might have on banks’ costs of funding. One approach is to look at how the values of banks’ equity and debt change in response to events that may have altered expectations that banks are TBTF. Another is to estimate whether debt costs vary across banks according to features that make them more or less likely to be considered TBTF. A third approach is to estimate a model of the expected value of government support to banks in distress. We review these different approaches, discussing their pros and cons. Policy measures are being implemented to end the TBTF problem. Approaches to estimating the extent of the problem could play a useful role in the future in evaluating the success of those policies. With that in mind, we conclude by outlining in what ways we think approaches need to develop and suggest ideas for future research.