April 27, 2020

An updated version of the paper "The Decline of Too Big To Fail" is now available. This is joint work with Darrell Duffie (Stanford) and Yichao Zhu (ANU).

For globally systemically important banks (G-SIBs) with U.S. headquarters, we find large post-Lehman reductions in market-implied probabilities of government bailout, along with big increases in debt financing costs for these banks after controlling for insolvency risk. The data are consistent with significant effectiveness for the official sector's post-Lehman G-SIB failure-resolution intentions, laws, and rules. G-SIB creditors now appear to expect to suffer much larger losses in the event that a G-SIB approaches insolvency. In this sense, we estimate a major decline of "too big to fail.''