Question

1.

a. What is “TBTF?” - Too Big to Fail

i. Does the “B” relate to assets? Deposits? Net cost of a P&A to the FDIC?

ii. Does the “F” mean revoking the charter? FDIC receivership? A bridge bank?

iii. Discuss the potential ambiguities.

b. How would higher capital requirements (CET1, Leverage, capital buffers, etc.) affect the incidence of TBTF actions?

2.         Closed Bank’s balance sheet:

	Assets ($mm)			Liab. & Capital
Good Assets	17,000		Insured Dep.	19,900
Questionable Assets	8,200		Uninsured Dep.	4,000
			Sub Debt	1,000
Total Assets	25,200		Equity	300

a. What is the cost to the FDIC of resolving the closure of the above bank if the FDIC has to insert $2,500, the highest bidder pays a premium of $400 (~2% of deposits) for the new equity, no uninsured depositors are covered, sub debt holders get nothing, and the market value of the Questionable Assets is only $1,500? The FDIC estimates that its operating and liquidation costs will be $325.

b. What is the implied franchise value of the new bank to the highest bidder

c. A new financial analyst at the FDIC argues that the operating and liquidation costs of a payout would be much smaller ($150 vs. $325). He sees that the FDIC would obtain all of the assets and could sell those. Using the information in a., you need to estimate the net cost of doing a payout on insured deposits. Do you agree with the analyst that a payout would be a lower cost alternative in comparison to the answer in a? What would be the net cash cost to the FDIC?

3. In an FDIC resolution of a bank closure through a full bank P&A, describe the extent to which each of the following is “bailed out.”

	a. common stockholders
	b. senior management
	c. uninsured depositors
	d. insured depositors e. borrowers

4. Give two examples of how regulation provided the motivation for innovation (new products or services) offered by the financial system.

Answer 1

1.aTBTF- "Too big to fail" is a term used for corporations, generally financial, which are so large that their collapse would have a disastrous effect on the well-being of the nation and hence the government supports these firms.

1.a.i They can be Big not only in term so of their assets but also their size, complexity, interconnectedness, and critical functions
1.a.ii F stands for facilitating a merger, providing credit, or injecting government capital all that can help the TBTF firm.