June 24, 2022

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 head- quarters, 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. The data are consistent with measurable effectiveness for the official sector’s post-GFC GSIB failure-resolution intentions. GSIB creditors now appear to expect much larger losses in the event that a GSIB approaches insolvency. In this sense, we estimate a major decline of “too big to fail.”