While such questions as "are regulators across countries 'in the pockets' of large banks?" and "do supervisors provide favorable treatment when bailing out large, global systemically important banks?" persist, conventional wisdom strongly implies that "regulators around the world give [Too-Big-To-Fail] TBTF banks preferential treatment in bailouts relative to other banks, often viewed as an unfair advantage for these banks."
While an unfair regulatory advantage tilting in favor of TBTF banks has "been engrained in the minds of banking researchers, policy makers, and the public around the world for decades," to date little empirical work has subject this belief to data. In a recent paper, Do “Too-Big-To-Fail” Banks Receive Preferential Treatment in Bailouts? Surprising Results from a Cross-Country Analysis, Allen Berger (Univ. S. Car.—Business) et al. do just that and find evidence that "soundly reject(s) implications of unfair preferential treatment concept."
The authors lever hand-collected bank bailout data in the EU from 2008-2014. Their sample includes 100 banks whose "cumulated total assets represent about 50 percent of the total assets of EU banks at the end of 2014" and "35 bailout events for capital injections and 61 bailout events for debt guarantees. Among these, 10 capital injections and 24 debt guarantee bailouts are provided to large, systemically important banks.”
The paper's findings largely contradict prevailing conventional wisdom. "We find statistically and economically significant evidence that regulators treat [Globally-Systemically Important Banks] G-SIBs more harshly than other banks. Regulators make G-SIBs wait longer for bailouts until their capital ratios have more significantly deteriorated, apply more severe restrictions to them, and withdraw government bailout support sooner at lower capital ratios than for other banks in their countries.” The abstract follows.
"Regulators more often bail out “Too-Big-To-Fail” banks than others, but this may not imply preferential treatment as commonly believed. Bailouts are complex dynamic processes involving more than one-time aid, so harsh treatments elsewhere in the process may counter the benefits of the higher likelihood of bailouts for these banks. Using bailout data from 22 European countries we find relatively harsh treatment for Globally-Systemically Important Banks. Regulators bail out G-SIBs at later stages of financial deterioration, impose stronger restrictions, and withdraw aid after less significant recoveries. We explain these findings using cross-country data on supervisory powers, political connections, and national culture."
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