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

Author/Editor:

Tryggvi Gudmundsson

Publication Date:

November 16, 2016

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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.

Series:

Working Paper No. 2016/224

Subject:

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

English

Publication Date:

November 16, 2016

ISBN/ISSN:

9781475554700/1018-5941

Stock No:

WPIEA2016224

Pages:

27

Please address any questions about this title to publications@imf.org