The Payoff From Being Too Big to Fail?

 The Wall Street Journal had an interesting piece suggesting that banks pay a premium for takeovers that bring their size up $100 billion. Maybe if the writeoffs get a bit bigger, Too Big To Fail status may pay off.

Two Federal Reserve economists, “Elijah Brewer III and Julapa Jagtiani, combed through 13 years of banking merger data to establish whether banks were willing to pay extra premiums to attain TBTF [Too Big To Fail] status, which they concluded was around $100 billion in assets.”

“… the researchers found that premiums shot up when a bank did a deal that vaulted it over the $100 billion asset threshold. Overall, the nine banks that did such deals paid an additional $14 billion to $16.5 billion to get to that gold-plated TBTF status.”

“”It’s more than Too Big To Fail. It includes all the benefits of being so big and powerful. These may not just be benefits from being bailed out, but being able to talk to the White House and Congress,” Ms. Jagtiani said in an interview. “There is a lot of subsidy provided to really large banks,” she added, noting that the study was the opinion of the authors and not the Federal Reserve. “It seems like we may be encouraging misallocation of resources.” She did caution that “at the Federal Reserve, we don’t have a list of Too Big To Fail banks”.”

Cimilluca, Dana. 2007. “Can Banks Grow Too Big To Fail? Research Finds Lenders Would Pay More to Cross $100 Billion Threshold.” (12 December): p. C 2.


2 comments so far

  1. euandus on

    How about relying not only on regulations, but also considering Paul Volcker’s advice from experience: being too big is itself a problem that can and should be remedied? I’ve just posted on it at


    • mperelman on

      I would include the restrictions on size as a very important regulation.

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