Ensuring that a subset of financial firms do not benefit from the perception that they are “too big to fail” (TBTF) is an important, frequently stated goal of ongoing financial regulatory reform efforts. Robustly assessing the empirical evidence of whether market perceptions of TBTF status reduce funding costs for some institutions is challenging but critical.
As new financial regulations intended to combat TBTF take effect, ongoing measurements of TBTF funding cost advantages can serve as a scorecard for financial reform efforts to date, and a useful indicator of whether alternative reforms may be needed to succeed in the battle against TBTF.
This working paper describes one result from a broader effort to review and update the empirical evidence of TBTF among US banking institutions. Our aim is to build on the most promising research on funding costs to develop a robust view of TBTF perceptions using the latest available information.
This study was sponsored by The Clearing House Association. All findings and recommendations are solely our own.
