Journal of Law, Finance, and Accounting > Vol 1 > Issue 1

Using Insured Deposits to Refine Estimates of the Large Bank Funding Advantage

William F. Bassett, Office of Financial Stability Policy and Research, Federal Reserve Board, USA, william.f.bassett@frb.gov
 
Suggested Citation
William F. Bassett (2016), "Using Insured Deposits to Refine Estimates of the Large Bank Funding Advantage", Journal of Law, Finance, and Accounting: Vol. 1: No. 1, pp 41-91. http://dx.doi.org/10.1561/108.00000003

Published: 29 Apr 2016
© 2016 W. F. Bassett
 
Subjects
Financial Markets: Financial Intermediation,  Industrial Organization: Regulatory Economics
 
Keywords
G21G28L25L51
Financial institutionsBank supervision and regulationToo big to failGovernment subsidies
 

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In this article:
1. Introduction
2. Literature Review
3. Methodology
4. Data and Sample
5. Discussion and Analysis
6. Robustness of Results
7. Conclusion
References

Abstract

The extraordinary government support for financial institutions during the financial crisis of 2007 to 2009 heightened interest in how much the perception of government support for the largest institutions affects their funding costs. However, parsing the many ways in which size affects the funding costs of very large financial institutions is hard, and previous work has produced wide-ranging estimates of the funding cost advantage of large banks. This paper shows that a size-based funding advantage is present in fully insured small time deposits, even though it is very unlikely to be related to perceptions of differential government support for large firms. That information is then used to account for various unobserved characteristics that researchers have pointed to as confounding previous estimates of funding cost advantages. The results indicate that the portion of the large bank funding advantage in liquid deposits that can be attributed to the perception of a too-bigto- fail subsidy is modest, usually statistically insignificant, and virtually nonexistent in post-crisis sample periods.

DOI:10.1561/108.00000003