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Are Banks in Switzerland Too-Big-To-Fail?

Mraovic, Aleksandra LU and Zhang, Qian LU (2014) NEKP01 20141
Department of Economics
Abstract (Swedish)
Too-big-to-fail has been a subject of controversy and has gained much attention in the course of the sub-prime financial crisis 2007-2009. Subjects related under this topic for instance are usually about the excessive risk taken by the government, and moral hazard. In this paper, we perform an analysis to examine the existence of too-big-to-fail impact on the banking sector in Switzerland during the financial crisis. By implementing a structural model to value the CDS contracts, and thus compare the model estimates with market observation. Deviation between model estimates and market data indicates the asymmetric expectations between shareholders and creditors. Since government bailout tends to favor creditors, thus the stock-implied model... (More)
Too-big-to-fail has been a subject of controversy and has gained much attention in the course of the sub-prime financial crisis 2007-2009. Subjects related under this topic for instance are usually about the excessive risk taken by the government, and moral hazard. In this paper, we perform an analysis to examine the existence of too-big-to-fail impact on the banking sector in Switzerland during the financial crisis. By implementing a structural model to value the CDS contracts, and thus compare the model estimates with market observation. Deviation between model estimates and market data indicates the asymmetric expectations between shareholders and creditors. Since government bailout tends to favor creditors, thus the stock-implied model estimates will be less affected. As we expected, overestimation of model predicted CDS spreads are found for banks in Switzerland, where the magnitude differs by government intervention. Our results comply with the theory that under government bailout, the expected default probability diverges between shareholders and creditors, which is a sign of having too-big-to-fail impact. (Less)
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author
Mraovic, Aleksandra LU and Zhang, Qian LU
supervisor
organization
course
NEKP01 20141
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Too-big-to-fail, Credit Default Swaps, CreditGrades model, Structural model
language
English
id
4647095
date added to LUP
2014-09-22 13:31:15
date last changed
2014-09-22 13:31:15
@misc{4647095,
  abstract     = {{Too-big-to-fail has been a subject of controversy and has gained much attention in the course of the sub-prime financial crisis 2007-2009. Subjects related under this topic for instance are usually about the excessive risk taken by the government, and moral hazard. In this paper, we perform an analysis to examine the existence of too-big-to-fail impact on the banking sector in Switzerland during the financial crisis. By implementing a structural model to value the CDS contracts, and thus compare the model estimates with market observation. Deviation between model estimates and market data indicates the asymmetric expectations between shareholders and creditors. Since government bailout tends to favor creditors, thus the stock-implied model estimates will be less affected. As we expected, overestimation of model predicted CDS spreads are found for banks in Switzerland, where the magnitude differs by government intervention. Our results comply with the theory that under government bailout, the expected default probability diverges between shareholders and creditors, which is a sign of having too-big-to-fail impact.}},
  author       = {{Mraovic, Aleksandra and Zhang, Qian}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Are Banks in Switzerland Too-Big-To-Fail?}},
  year         = {{2014}},
}