The value and price of a "too-big-to-fail" guarantee: evidence from the insutance industry

This paper analyzes the impact of the evolution of the regulation dealing with systemically important insurance groups, using an event study methodology. The results show that investors were able to detect which companies were to be designated well ahead of the publication of the list. Most importantly, after an initial positive reaction, consistent with the expectation of a “too-big-to-fail” implicit subsidy, the disclosure on how the capital charges for systemic insurers would be calculated led to sizeable negative abnormal returns for the entities concerned. Leverage plays a key role in driving investors’ reaction; more leveraged entities experience higher abnormal returns when the expectation of a TBTF guarantee arises and lower ones when information on the size of the capital charges is revealed.