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Title:Does banks size distort market prices? Evidence for too-big-to-fail in the CDS market PDF Logo
Authors:Völz, Manja
Wedow, Michael
Issue Date:2009
Series/Report no.:Discussion Paper Series 2: Banking and financial studies 2009,06
Abstract:This paper examines the potential distortion of prices in the CDS market caused by too-big-to-fail. Overall, we find evidence for market discipline in the CDS market. However, CDS prices are distorted due to a size effect which arises when investors expect a public bail-out as a result of too-big-to-fail. A one percentage point increase in size reduces the CDS spread of a bank by about two basis points. We further find that some banks have already reached a size that makes them too-big-to-be-rescued. While the price distortion for these banks decreases the existence of banks that are considered to be toobig-to-rescue raises important new issues for banking supervisors.
Subjects:Market Discipline
Too Big To Fail
Too Big to Rescue CDS Spreads
JEL:G14
G21
G28
ISBN:978-3-86558-505-9
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank

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