August 22, 2023
Darrell Duffie (Stanford), Yichao Zhu (ANU) and I just completed a new version our the paper "The Decline of Too Big To Fail".
For globally systemically important banks (GSIBs) with US headquarters, we find significant reductions in market-implied probabilities of government bailout after the Global Financial Crisis (GFC), along with roughly 170\% higher wholesale debt financing costs for these banks after controlling for insolvency risk. Since the GFC, bank creditors appear to expect much larger losses in the event that a GSIB approaches insolvency. In this sense, we estimate a decline of ``too big to fail.''