Whose Credit Line is it Anyway: An Update on Banks' Implicit Subsidies

November 16, 2016

Preview Citation

Format: Chicago

Tryggvi Gudmundsson. Whose Credit Line is it Anyway: An Update on Banks' Implicit Subsidies, (USA: International Monetary Fund, 2016) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset and liability management, Asset prices, Asset valuation, Banking, Financial crises, Financial institutions, Global systemically important banks, Prices, Stocks

Keywords: Asset price assumption, Asset prices, Asset valuation, Asset volatility, Bank assets, Bank's assets, Capital regulation, Fair value, Global, Global systemically important banks, Implicit subsidies, Market value of assets, Recovery rate, Stocks, Systemically-important banks, Value destruction, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/224
Stock No:

WPIEA2016224
ISBN:

9781475554700
ISSN:

1018-5941

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