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Systemic at Home: the Persistence of a Too-Big-to-Fail Premium in Europe

Working paper 868
Working Papers
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Published: 02 September 2026

By: Laura Deen Daniel Dimitrov

We quantify the implicit too-big-to-fail (TBTF) funding advantage of large Eu-ropean banks using CDS market data. Applying a reduced-form asset pricing frame-work, we decompose spreads into a fundamental credit-risk component and a resid-ual wedge attributable to implicit government support. We do not find evidence that G-SIB designation is associated with lower funding costs once bank funda-mentals and sovereign factors are taken into account. By contrast, banks whose assets exceed half of home-country GDP enjoy at least 30% lower credit spreads than those of otherwise comparable peers. A time-varying specification reveals that the TBTF wedge persists through 2024, and while average spreads are significantly lower across the board compared to the period around the Great Financial Crisis, the implicit bailout guarantee as a proportion of total spreads has not diminished in recent years. Moreover, the results suggest that the TBTF premium depends on sovereign fiscal strength: the funding advantage of systemic banks declines when home-sovereign CDS spreads rise. This points to Europe’s TBTF problem being primarily domestic in nature and relates to the strength of the home sovereign.

Keywords: too-big-to-fail; CDS spreads; implicit subsidies; systemic risk; Euro-pean banking; sovereign-bank nexus
JEL codes G21; G28; G12; H81

Working paper no. 868

868 - Systemic at Home: the Persistence of a Too-Big-to-Fail Premium in Europe

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Research Highlights

  • Using CDS spreads for a sample of European banks, this paper examines whether systemic banks still benefit from a funding advantage.

  • We find that G-SIB designation itself is not associated with lower funding costs once we account for a bank’s fundamental credit risk.

  • By contrast, banks whose assets exceed around 50% of home-country GDP benefit from materially lower funding costs than comparable peers.

  • The funding advantage weakens when home-sovereign credit risk rises, linking bailout expectations to sovereign fiscal strength.

  • Taken together, the evidence points to Europe’s too-big-to-fail problem being primarily domestic in nature and rooted in the sovereign-bank nexus.


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