1. Does size matter? Bailouts with large and small banks
- Author
-
Eduardo Dávila and Ansgar Walther
- Subjects
CRISES ,Economics and Econometrics ,Leverage (finance) ,Economics ,Economic policy ,Strategy and Management ,Social Sciences ,Bank regulation ,Too big to fail ,Monetary economics ,FINANCIAL FRAGILITY ,TIME-INCONSISTENCY ,Business & Economics ,FAIL ,Accounting ,0502 economics and business ,Size tax ,1402 Applied Economics ,040101 forestry ,Hardware_MEMORYSTRUCTURES ,050208 finance ,Strategic complements ,05 social sciences ,COST ,1502 Banking, Finance and Investment ,04 agricultural and veterinary sciences ,Business, Finance ,TOO ,1606 Political Science ,restrict ,0401 agriculture, forestry, and fisheries ,Business ,Bailouts ,Finance ,Too many to fail ,LOAN RATE MARKUP ,Bailout - Abstract
We explore how large and small banks make funding decisions when system-wide bailouts are possible. 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 banks leverage more than small banks because they internalize that their decisions directly affect bailout policies. 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 bailouts more likely. The optimal regulation features size-dependent policies that disproportionately restrict large banks’ leverage.
- Published
- 2020