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Whose Credit Line is it Anyway

An Update on Banks' Implicit Subsidies

Whose Credit Line is it Anyway by Tryggvi Gudmundsson
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The post-crisis financial sector framework reform remains incomplete. While capital andliquidity requirements have been strengthened, doubts remain over other aspects,including the fact that expectations of government support for systemically-importantbanks (SIBs) remain intact. In this paper, we use a jump diffusion option-pricing approachto provide estimates of implicit subsidies gained by these banks due to the expectation ofprotection to creditors provided by governments. While these subsidies have declined inthe post-crisis era as volatility has declined and capital levels have increased, they remainnon-trivial. Even conservative parameterizations of default and loss probabilities lead tomacroeconomically significant figures.
International Monetary Fund; November 2016
27 pages; ISBN 9781475554724
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Title: Whose Credit Line is it Anyway
Author: Tryggvi Gudmundsson