Too-Big-to-Fail in Banking: Impact of G-SIB Designation and Regulation on Relative Equity Valuations

Description

This book provides a comprehensive summary of the latest academic research on the important topic of too-big-to-fail (TBTF) in banking. It explains TBTF from various perspectives including the range of regulatory measures proposed to counter TBTF, most notably the globally accepted regulation of global-systemically important banks (G-SIBs) and its main tool of capital surcharges. The empirical analysis quantifies the shareholder value of the G-SIB attribution by using quarterly observations from more than 750 global banks between Q2 2008 and Q3 2015. The main finding is that G-SIBs are confronted with a substantial relative valuation discount compared to non-G-SIBs. From the end of 2011 until the end of 2015, a stable discount of 0.6x–0.8x price-to-tangible common equity (P/TCE) is statistically highly significant. The results suggest that the G-SIB designation effect, which positively impacts G-SIBs’ share prices because of funding benefits from IGGs, is dominated by the regulatory G-SIB burden effect, which negatively impacts G-SIBs’ share prices because of lower profitability due to capital surcharges and other regulatory requirements placed on G-SIBs. The findings re-open the debate about whether breaking up G-SIBs would unlock shareholder value and whether G-SIBs are regulated efficiently. Foreword Abstract Contents Abbreviations List of Figures List of Tables 1 Introduction and Overview 1.1 General Context and Current Developments 1.2 Research Objective and Methodology 1.3 Dissertation Structure 2 A Primer for Economics of Banking 2.1 Financial System 2.2 Introduction to Banks 2.3 Bank Run, Bank Panics, Systemic Risk and Bankruptcy 2.4 Bank Run Prevention and Management 2.5 Creditor and Bank Moral Hazard 2.6 Financial and Economic Crises 2.7 Banking Regulation Part I Too-Big-to-Fail in Banking Review 3 Introduction to Too-Big-to-Fail in Banking 3.1 The Definition of ‘TBTF’ 3.2 The Term ‘TBTF’ 3.3 Systemic Importance 3.4 The History of TBTF 3.4.1 Banking Without Bailouts (Before 1913) 3.4.2 The Breeding Ground of TBTF (1913–1933) 3.4.3 The First Major Bailouts (1934–1984) 3.4.4 The First Regulatory Efforts to Restrict Bailouts (1985–1998) 3.4.5 TBTF Grows Up (1999–2009) 3.4.6 TBTF Lessons Learnt 4 TBTF Causal Chain: Explicit and Implicit Government Guarantees 4.1 Explicit Government Guarantees (EGGs) (Bailout) 4.1.1 EGG Motivation 4.1.2 EGG Scope 4.1.3 EGG Methods 4.1.4 EGGs and Stakeholders 4.2 Implicit Government Guarantees (IGGs) 4.2.1 IGG Origin 4.2.2 IGG Strength 4.2.3 Creditor Moral Hazard 4.2.4 Bank Moral Hazard 4.2.5 Shareholder Moral Hazard 5 Public Costs and Benefits of TBTF 5.1 Economies of Large Banks (Incentives for Scale and Scope) 5.2 Public Costs and Benefits of EGGs 5.3 Public Costs and Benefits of IGGs 5.4 Overall Results 6 TBTF Policy Recommendations 6.1 Crisis Prevention (ex ante) 6.1.1 Corporate Governance (e.g., Compensation and Disclosure) 6.1.2 Supervision (e.g., Supranational Regulator) 6.1.3 Restriction (e.g., Limitations of Size and Scope) 6.1.4 Price-based regulations (e.g., Capital Surcharges and Contingent Capital) 6.2 Crisis Management (ex post) 6.3 Crisis Resolution 7 TBTF Policy Initiatives 7.1 European Banking Union 7.2 Dodd-Frank Act in the US 7.3 Global BCBS regulation: Basel III 7.4 Global FSB Regulation: G-SIBs 8 Conclusion 8.1 Summary 8.2 Outlook Part II Quantifying the Shareholder Value of Too-Big-to-Fail in Banking 9 Related Research 9.1 Impact of TBTF on Equity 9.1.1 Translation of TBTF Funding Benefits 9.1.2 TBTF Premiums in Precedent M&A Transactions 9.1.3 TBTF Sum-of-the-Parts 9.1.4 Share Price Reactions to TBTF Events 9.1.4.1 TBTF Designation Effect 9.1.4.2 TBTF Effect 9.1.4.3 Reverse TBTF Effect 9.1.4.4 Regulatory TBTF Burden Effect 9.1.4.5 G-SIB Designation 9.2 Two-Way Fixed-Effect Regression Analysis 9.3 Relative Bank Valuation and Explaining Factors 9.3.1 Market-oriented bank valuation 9.3.2 Theoretical Decomposition of P/BV 9.3.3 Empirical Explanation of P/BV 9.3.4 Intangible Assets and Bank Valuation 10 Hypothesis Development 10.1 Research Gaps vs. Research Objectives 10.2 Research Hypotheses 11 Empirical Methodology and Data 11.1 Regression Framework 11.2 Dependent Variable: Price-to-Tangible Common Equity (P/TCE) 11.3 Explanatory Variables 11.3.1 Return on Tangible Common Equity (RoTCE) 11.3.2 Opportunity Costs (CoTCE) 11.3.3 Growth (g) 11.3.4 Further Control Variables 11.3.5 Test Variable: Unobserved G-SIB-Constant Variable (–Dummy Variable) 11.4 Sample Data 11.4.1 Database Requirements 11.4.2 Data Characteristics 11.4.3 Process of Generating Data 11.5 Sample Characteristics 11.6 Regression Function 12 Results and Discussion 12.1 Results 12.2 Discussion 12.2.1 Regression Coefficients 12.2.2 Further Tested and Excluded Variables 12.2.3 G-SIB Dummy 12.2.4 Limitation of the Study 12.2.5 Areas of Future Research 13 Conclusion 13.1 Summary 13.2 Recommendations References