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Does size matter? Bailouts with large and small banks

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Title: Does size matter? Bailouts with large and small banks
Authors: Davila, E
Walther, A
Item Type: Journal Article
Abstract: We explore how large and small banks make funding decisions when system-wide bailouts arepossible. We show that bank size, purely on strategic grounds, is a key determinant of banks’leverage choices, even when bailout policies treat large and small banks symmetrically. Large banksleverage more than small banks because they internalize that their decisions directly affect bailoutpolicies. In equilibrium, this effect is amplified by strategic spillovers to small banks, since banks’leverage choices are strategic complements. Overall, the presence of large banks makes bailoutsmore likely. The optimal regulation features size-dependent policies that disproportionately restrictlarge banks’ leverage.
Issue Date: 1-Apr-2020
Date of Acceptance: 31-Mar-2019
URI: http://hdl.handle.net/10044/1/70209
DOI: 10.1016/j.jfineco.2019.09.005
ISSN: 0304-405X
Publisher: Elsevier
Start Page: 1
End Page: 22
Journal / Book Title: Journal of Financial Economics
Volume: 136
Issue: 1
Keywords: Social Sciences
Business, Finance
Economics
Business & Economics
Bailouts
Bank regulation
Too big to fail
Too many to fail
Size tax
LOAN RATE MARKUP
FINANCIAL FRAGILITY
TIME-INCONSISTENCY
CRISES
COST
FAIL
TOO
1402 Applied Economics
1502 Banking, Finance and Investment
1606 Political Science
Finance
Publication Status: Published
Online Publication Date: 2019-09-24
Appears in Collections:Imperial College Business School



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