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Whose Credit Line is it Anyway: An Update on Banks' Implicit Subsidies
Author:
Tryggvi Gudmundsson
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Series:
IMF Working Papers
Volume/Issue:
Volume 2016: Issue 224
Language:
English
Publication Date:
16 Nov 2016
DOI:
https://doi.org/10.5089/9781475554700.001
ISBN:
9781475554700
ISSN:
1018-5941
Pages:
27
Keywords:
WP; fair value; Implicit subsidies; systemically-important banks; capital regulation; bank assets; asset price assumption; asset volatility; recovery rate; bank's assets; market value of assets; value destruction; Asset prices; Stocks; Asset valuation; Global systemically important banks; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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The post-crisis financial sector framework reform remains incomplete. While capital and liquidity requirements have been strengthened, doubts remain over other aspects, including the fact that expectations of government support for systemically-important banks (SIBs) remain intact. In this paper, we use a jump diffusion option-pricing approach to provide estimates of implicit subsidies gained by these banks due to the expectation of protection to creditors provided by governments. While these subsidies have declined in the post-crisis era as volatility has declined and capital levels have increased, they remain non-trivial. Even conservative parameterizations of default and loss probabilities lead to macroeconomically significant figures.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund