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

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