What question did this study set out to answer?

The objective is to analyze how the Dodd-Frank Act affected bond yields for large banks compared to smaller banks.

January 22, 2026Journal of risk and financial management0 citationsOpen Access

Regulations and the “Too-Big-to-Fail” Problem: Evidence from the Dodd–Frank Act

JGJenny GuUniversity of Dallas YSYingying ShaoChinese Academy of Sciences PLPu LiuUniversity of Arkansas at Fayetteville

Key Points

The objective is to analyze how the Dodd-Frank Act affected bond yields for large banks compared to smaller banks.
Examined credit ratings and bond yields before and after the Dodd-Frank Act.
Compared yield spreads between big banks and non-big banks.
Controlled for intrinsic creditworthiness in the analysis.
Documented a significant yield discount for large banks beyond indicated credit ratings.
Found that big banks with lower ratings pay less than non-big banks with higher ratings.
Noted that the additional discount largely disappeared after the Dodd-Frank Act.

Abstract

Before the enactment of the Dodd–Frank Act, firm size was taken into account by rating agencies in determining the credit ratings of banks. Therefore, the “too-big-to-fail” problem was, at least partially, reflected in big banks’ elevated ratings, which are more than justified by intrinsic creditworthiness. What is unclear is whether the bond market still gives an additional discount in yield to big banks over and above the lower yield spread that is already reflected in the elevated credit ratings due to their size. In this study, we examine this question and document a significant incremental yield discount for large banks even after controlling for credit ratings. Furthermore, we find that big banks with lower ratings pay lower borrowing costs than non-big banks with higher ratings. This additional discount, however, mostly disappeared after the Dodd–Frank Act.

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