No other sector in the United States economy Privately against overall collapse - with around half of the market value of the financial sector during 2003-9 accounted for by collective bailout guarantees. The authors infer that “investors price in substantial government bailout guarantees for the financial sector as a whole” - thus the index puts are cheap, because you don’t need to insure Particularly during the recent financial crisis. Put options are cheaper if they are less valuable to investors as protection against price collapses, and the index puts are a lot cheaper than the appropriately weighted sum of put options on individual bank stocks, Kelly, Hanno Lustig and Stijn Van Nieuwerburgh compare the price of put options (i.e., the option to sell and therefore lock in a price) for the financial sector stock index relative to put options on individualīanks’ stocks (Disclosure: I’m a research associate at the National Bureau of Economic Research, which published this paper, and co-director of its Africa Project but had nothing to do with this paper). Most independent analysts and many people active in financial markets regard this proposition as unproven at best and, most likely, incorrect.įor example, in a new working paper, “Too-Systemic-to-Fail: What Option Markets Imply About Sector-Wide Government Guarantees,”īryan T. In some official minds, Dodd-Frank has made it impossible for too-big-to-fail banks to exist - if any such bank got into trouble, it would be shut down without any significant costs being incurred by taxpayers. (Steven Pearlstein had a very good column in The Washington Post on Sunday on the background to these deals.) On the merger front, Capital One plans to buy the online business of ING, and PNC is acquiring the American business of Royal Bank of Canada.īoth acquisitions would create banks with assets around $300 billion.
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Perspectives from expert contributors.But three important and related issues emerged this summer that the FSoc needs to consider quickly: impending bank mergers that could create two more too-big-to-fail banks whether to force the breakup of Bank of America and how to rethinkĬapital requirements for large systemically important banks, particularly as continuing European sovereign debt problems undermine the credibility of the international Basel Committee approach to bank capital.
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