Financial Safety Nets: The Good, the Bad, and the Ugly

28 Pages Posted: 20 Mar 2017

See all articles by Edward J. Kane

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: December 14, 2016

Abstract

This paper focuses on the adverse long-run and distributional effects of stealthy zero-haircut rescues of US and EU mega-banks by central bankers during the Great Financial Crisis and its aftermath. It explores movements in the crisis and post-crisis behavior of credit spreads at a sample of US and EU mega-banks and develops a method for determining the extent to which the debt of individual firms is or is not trading principally on the taxpayers’ dime. This analysis indicates that creditors remain unpersuaded by post-crisis reforms meant to signal an end to too-big-to-fail policy commitments and see these reforms instead as half-measures that do not change the underlying incentive structure under which mega-banks and their regulators operate.

Keywords: too big to fail banks, financial crisis, financial reform, European bank crisis

JEL Classification: G18, F65, E58, F38

Suggested Citation

Kane, Edward J., Financial Safety Nets: The Good, the Bad, and the Ugly (December 14, 2016). Available at SSRN: https://ssrn.com/abstract=2885510 or http://dx.doi.org/10.2139/ssrn.2885510

Edward J. Kane (Contact Author)

Boston College - Department of Finance ( email )

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National Bureau of Economic Research (NBER)

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