Determining Financing Subsidies of SIFIs by Examining Bond Spreads

Being a systemically important financial institution may lead to lower financing costs, often referred to as a "borrowing subsidy". Existing studies on determining financing subsidies are limited and have several shortcomings: they either use ordinal scaled ratings to measure the rating bonus of systemically important financial institutions and thereafter approximate the financing subsidy of these financial institutions, or they classify financial institutions according to whether they are systemically important or not. By using a newly developed measure for systemic risk, namely the SES approach – we directly estimate the impact of systemic risk on the bond spreads of financial institutions. We observe that systemically important financial institutions receive financing subsidies of up to 70 basis points. Our analysis further shows that by using the newly developed measure on systemic risk, namely SES, regulators are able to set accurately bank individual levies to internalize systemic risk externalities. Hence, considering the current discussion about internalizing systemic risk externalities through the introduction of a levy, this analysis is of importance for regulators as well as practitioners