Too-big-to-fail and bank holding company behavior

On September 19, 1984, the Comptroller of the Currency declared that some banks are "too-big-to-fail" (TBTF). In the event of failure, the largest 11 banks would receive, de facto, 100 percent deposit insurance which would mitigate against bank runs by uninsured depositors. This dissertation explores the impact of TBTF on the market and the BHC. This research examines the TBTF doctrine in the following areas: (1) the market's reaction to the TBTF doctrine on the security price of BHCs, (2) differences in the market's reaction to dividend cuts and omissions between the pre- and post-TBTF periods, (3) changes in BHC asset composition associated with the incentives related to the TBTF doctrine, and (4) changes in BHC efficiency caused by the TBTF doctrine. The first section of this dissertation shows that positive price appreciation was experienced by BHCs outside those 11 BHCs mentioned by the Wall Street Journal following the Comptroller's announcement. Subsequent results from a cross-sectional regression show that the market does not regard asset size or portfolio risk as the primary, factors when regulators make the determination of who receives TBTF coverage. The second section of this dissertation uses an event study to observe the market's reactions to dividend cuts and omissions. The results show that the market's reaction to dividend cuts and omissions were significantly stronger prior to the Comptroller's announcement than after. Further segmentation of the market's reaction, based on asset size and institutional involvement, reinforces the above results. The third section uses a cross-sectional time-series regression to observe changes in asset portfolio composition. The results show that only those publicly traded BHCs with asset size over $12 billion dollars experienced significant increases in asset size, increases in letters of credit, and reductions in capital. For BHCs under $12 billion dollars, the results show that changes in asset composition is not consistent with either the asset or periphery growth strategies. The last section uses a multi-product quadratic cost function to observe changes in BHC efficiency. The results show that all BHCs, regardless of asset size or whether the BHC has publicly traded equity, experienced a significant reduction in efficiency after TBTF.