Size anomalies in US bank stock returns : a fiscal explanation

"We use bank stock returns to develop an ex-ante measure of the distortion created by the implicit collective guarantee extended to large U.S. financial institutions. The average return on a stock portfolio that goes long in the largest U.S. commercial banks and short in the smallest banks is nearly minus 8% compared to a portfolio of non-bank stocks and bonds with the same exposure to standard risk factors. We provide evidence that 6.35 % of this spread is a subsidy that reflects the government's implicit guarantee of large banks, but not of small banks, when a financial disaster occurs. As predicted by theory, this long-short portfolio of bank stocks rallies during recessions, when the probability of a financial disaster increases, while the benchmark portfolio of non-banks stocks and bonds does not. This 6.35% spread can be decomposed into a 3.1% implicit subsidy to the largest commercial banks and a 3.25% tax on the smallest banks. The annual subsidy to the largest commercial banks is $4.71 billion per bank in 2005 dollars"--National Bureau of Economic Research web site