“too big to fail“

In recent years, especially after the global financial crisis (GFC), "too big to fail" (TBTF) has become an important topic in the financial and regulatory debate. Under a regulatory safety net, large banks benefit from expanding their scale and being eligible for TBTF subsidies, and in the event of a financial crisis, large banks will receive the most assistance, which prevents them from failing. There is a widely-held view that banks gain from becoming bigger and that this gain comes from having access to a stronger regulatory safety net.

In the paper Are the largest banks valued more highly (Minton et al.’s(2018)), the value of too-big-to-fail (TBTF) banks is shown to be negatively related to asset size, especially in normal times. Their research aim is to determine if enhanced DF supervision provides its intended regulatory target any valuation benefit, with increased size conferring a TBTF subsidy via strengthened safety net access to public resources. Further probing the implications of size, the authors also assess whether this safety net incentivizes banks to become riskier or to increase leverage as they exceed DF thresholds. The study examines a sample from the Federal Reserve’s comprehensive 1986–2017 annual financial and stock price data for all large US publicly traded bank holding companies. The analysis focuses on banks with assets above US$10 billion in 2010 dollars and a deposits-to-assets ratio of at least 10%, representing 80% of total banking system assets as of 2017. The TBTF subset of the largest institutions has a lower bound of US$50 billion in total asset book value in 2010 dollars.

The authors assess valuation effects using Tobin’s q and market-to-book (MB). They infer riskiness and probability of distress from a bank’s Z-score and measure the systematic risks of banks through a market model beta. Return on assets (ROA) and return on equity (ROE) indicate operational performance. The authors use statistical methods, including piecewise linear models and non-parametric tests, to explore bank valuation and size in the cross-section, paying special attention to the pre-GFC period to identify potential origins of TBTF effects.

They found that the value of the largest banks is negatively related to asset size in normal times, but not during the financial crisis when TBTF status was most valuable. They found Breaching the TBTF threshold by acquisition is costly to shareholders. This relationship is partially explained by the market’s discounting of a bank’s trading activities.

Difffferent from banks in the United States,The results weakly support the positive relationship between size and Tobin's q for Japanese banks in Bank valuation and size Evidence from Japan(Sakawa et al.( 2020)).

This study replicates an empirical study to determine whether the valuation of Japan's TBTF banks is negatively associated with their size, as is the case with U.S. banks. Their empirical study finds that the valuation of Japanese TBTF banks is not significantly associated with their size both of during the pre-crisis period (1987–2006) and over the entire period (1987–2017), as opposed to the U.S. case.

this reason of why Japan's TBTF banks could not be explained by the TBTF hypotheses is also discussed in this paper. Because of stronger regulations in the wake of the financial crisis, it is more expensive for banks to operate in the United States. However, due to the Japanese banking system, Japan’s TBTF banks are willing to engage in higher-risk banking activities, leading to lower valuations. At the same time, the global financial crisis may has little impact on large Japanese banks, but many benefits were obtained because of their TBTF status during the financial crisis, and the regulations after the global financial crisis did not increase the cost of TBTF status.

As the world’s most vigorously developing economy with the fastest growth rate, China’s banking supervision and research has attracted worldwide attention.

In FAN Xiaoyun and WANG Daoping ’s “Too Big to Fail” or “Too Connected To Fail”-An Analysis of China's Banking Sector, this authors analyse the impact of the interconnectedness on bank's systemic importance Based on a network model. The model shows that the degree of debt correlation with other banks is an important factor that affects the importance of the banking system. Banks that are highly correlated with other banks through interbank liabilities are not only prone to systemic crises, but also lead to large bank bankruptcies and systemic losses. Secondly, it proposes a systemically important bank measurement method suitable for China's national conditions. Supervisory authorities can use this method and set the critical value standard of concern based on China's national conditions to identify and effectively supervise systemically important banks.

This paper analyzes several banks' balance sheet data in China from 2007 to 2009.Simulation experiments show that China's five major state-owned commercial banks are basically systemically important.In addition, it is important to note that part of the joint-stock commercial and policy Banks and city commercial Banks, in the event of failure also can cause larger systemic damage due to other bank bankruptcy, in which individual Banks once its bankruptcy will be more likely to induce a systemic crisis, therefore, their importance system should not be underestimated.In this sense, simply defining large state-owned commercial banks as systemically important banks is obviously not enough to maintain the soundness and security of China's banking sector.

To sum up, the three articles discuss the issue of "big but not fail" in the banking industry from the United States, Japan and China. Due to the different national conditions of each country, the banking supervision among three countries and the status of "big but not fail" banks varies greatly. For example, in the United States, after the financial crisis, the government’s policy supervision has led to the high cost of banks maintaining the status of “big to fail”; while in Japan, due to its banking policy, the banks that fail to fail are not affected. The impact of many regulatory policies; and from the conclusion of the paper, China’s current banking supervision clearly has more places to learn from and learn from developed countries.