VoxEU, June 30, 2025. With Cyril Monnet and Remo Taudien. HTML.

From the text:

To judge the incentive effects of a public liquidity backstop framework, ideally one would assess its contribution to the overall too-big-to-fail subsidy. However, isolating this contribution is empirically challenging. To estimate the broader too-big-to-fail subsidy, we conduct a quantitative analysis based on the industry-standard CreditGrades framework (Merton 1974, Finkelstein et al. 2002). Using publicly available data for 2022 and applying conservative assumptions about recovery rates and asset volatility, we estimate that UBS Group AG benefited from an annual senior debt subsidy of approximately $2.9 billion–somewhat below the range reported in comparable studies.

This finding underscores the need for a regulatory framework that effectively addresses the incentive distortions created by such subsidies. Any meaningful solution should adopt a holistic approach, targeting the combined consequences of too-big-to-fail status. Crucially, corrective measures should operate ex-ante –targeting the incentives of current management and shareholders–rather than relying on punitive conditions imposed during a crisis. Ex-post penalties risk undermining the resolution process (‘throwing out the baby with the bathwater’) and may lack political feasibility in the face of imminent failure. Importantly, and contrary to the approach outlined in the Swiss proposal, effective regulation must also be independent of a bank’s current financial performance, which reflects past decisions and random shocks rather than the decisions that regulation seeks to influence.