RFS Advance Access published online on May 27, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp039
Too Many to Fail? Evidence of Regulatory Forbearance When the Banking Sector Is Weak
Bert W. Wasserman Department of Economics and Finance, Zicklin School of Business
Department of Finance, MIT-Sloan
Send correspondence to Craig O. Brown, Bert W. Wasserman Department of Economics and Finance, Zicklin School of Business, Baruch College, City University of New York, One Bernard Baruch Way, PO Box B10-225, New York, NY 10010; telephone: (646) 312-3519; fax: (646) 312-3451; E-mail: Craig.Brown{at}baruch.cuny.edu.
JEL Classification: E58, F30, G21, G28
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Abstract |
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This article studies bank failures in twenty-one emerging market countries in the 1990s. By using a competing risk hazard model for bank survival, we show that a government is less likely to take over or close a failing bank if the banking system is weak. This Too-Many-to-Fail effect is robust to controlling for macroeconomic factors, financial crises, the Too-Big-to-Fail effect, domestic financial development, and concerns due to systemic risk and information spillovers. The article also shows that the Too-Many-to-Fail effect is stronger for larger banks and when there is a large government budget deficit.
We are grateful for comments by Paolo Fulghieri (the editor), an anonymous referee, and Maria Soledad Martinez Peria. In addition, we would like to thank participants at the Bank of England seminar, the Office of the Comptroller of Currency seminar, and the World Bank Banking Regulation and Corporate Governance conference. Craig Brown wishes to thank the Research Foundation of the City University of New York for financial support.