EBI is happy to announce a contribution of Nordine Abidi (International Monetary Fund) and Ixart Miquel-Flores (European Central Bank; Frankfurt School of Finance and Management) in the EBI Working Paper Series No. 124. Their paper entitled “Too Tech to Fail?” was published on 29 June 2022.
Do the biggest tech companies have a bond funding edge? Are they the new ”Too-Big-to-Fail” (TBTF)? TBTF represents, among other things, the idea that the biggest firms (usually banks) receive an unfair funding advantage over smaller ones in the bond market. By investigating the tech financial world, the authors’ empirical work reveals two important findings. First, within the universe of bond-issuing U.S. firms, the largest tech companies did experience a funding advantage – of about 30bps. on average – from 2014 to 2021. The authors’ estimates suggest that the (implicit) subsidy is in the range of 1 to 2 USD billion per year and that this has been steadily rising over the last years, especially during the Covid-19 period. Second, using a unique dataset of security-level portfolio holdings by sector in each euro area country, the authors investigate portfolio choices during times of financial distress. They find evidence of a sharp relative increase in portfolio holdings of BigTech securities during times of market turbulence suggesting that BigTech bonds act as safe assets. Overall, while the magnitudes of their estimates remain small from a macroeconomic perspective, they find that BigTech companies are slowly converging towards what they call the ”Too-Tech-to-Fail” (TTTF) paradigm. In other words, the unique position these companies have in the new economy, seems to artificially boost their credit profiles and lower their bond funding costs, potentially creating an uneven playing field.