Comment

Abstract

I salute the authors’ endeavor to usemarket price to examine the riskiness of the financial system and to evaluate the change in the subsidy represented by government guarantees. As illustrated by my work with Natasha Sarin (Sarin and Summers 2016), which the authors reference, I believe that market information is at a minimum a valuable complement to accounting information in evaluating the health of banks. I would guess that their broad conclusion—that if a crisis like 2008 were to happen again,wewould have insolvent banks—is correct. And I find it plausible that, as the authors believe, a combination of more regulatory capital, establishment of resolution procedures, and official commitments to move beyond too-big-to-fail have reduced the market’s perception of implicit guarantees. That said, I have to report that I’m almost entirely unconvinced by any of the authors’ estimates and believe that all reflect arbitrary and in some cases implausible modeling assumptions. I do not believe they have any real basis for their claims about the extent to which declining franchise value, as opposed to capitalized government subsidies, is responsible for banks’ lowmarket-to-book equity ratios. It’s not that I have clearly different views than the authors, just that I do not believe their measurements are convincing. First, there are some real questions about the theory of subsidies that are raised by the kind of analysis that is done here. Let’s imagine that the government decided to subsidize ice cream cones for all companies that sold ice cream cones. What would we expect? I think we would expect that there would be lower-priced ice cream cones. I think we would expect that the quantity of ice cream cones sold would go up. I think we would expect no change in the Q ratio of ice cream cone companies, if this was a competitive industry. If ice cream cones, and the production of ice cream cones, involved investment that took place with adjustment costs,