What’s the Value of a Tbtf guaranty? Evidence from the G-sii designation for insurance companies
We document median abnormal stock returns of 12% (U.S. $17.2 billion) for international insurance firms designated as Global Systemically Important Insurers (G-SII). These gains are associated with a fall in default probabilities, an increase in expected asset risk and a loss to creditors. Over the same event window, identical measures for other large insurance firms show no significant changes, on average. Abnormal price responses for the G-SII show significant cross correlations with measures of firm risk and with country-level measures of regulatory quality. These results suggest that the market perceives a TBTF guaranty as unambiguously lowering risk for the largest and riskiest firms, but this drop in risk still comes with some cost in increased equity returns for protected firms, despite new, costly compliance measures and an increased emphasis on curtailing moral hazard effects.
Area: Financial Stability
Keywords: Too big to fail (TBTF), Global systemically important financial institutions (G-SIFI); Global Systemically Important Insurers (G-SII), Insurance, Financial regulation
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