Abstract

http://ssrn.com/abstract=925699
 
 

Citations



 


 



Too Many to Fail - An Analysis of Time-Inconsistency in Bank Closure Policies


Viral V. Acharya


New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Tanju Yorulmazer


Federal Reserve Bank of New York


Journal of Financial Intermediation, Forthcoming

Abstract:     
While the too-big-to-fail guarantee is explicitly a part of bank regulation in many countries, this paper shows that bank closure policies also suffer from an implicit too-many-to-fail problem: when the number of bank failures is large, the regulator finds it ex-post optimal to bail out some or all failed banks, whereas when the number of bank failures is small, failed banks can be acquired by the surviving banks. This gives banks incentives to herd and increases the risk that many banks may fail together. The ex-post optimal regulation may thus be time-inconsistent or sub-optimal from an ex-ante standpoint. In contrast to the too-big-to-fail problem which mainly affects large banks, we show that the too-many-to-fail problem affects small banks more by giving them stronger incentives to herd.

Keywords: Bank regulation, systemic risk, bailout, moral hazard, herding, too big to fail

JEL Classification: G21, G28, G38, E58, D62

Accepted Paper Series





Not Available For Download

Date posted: August 22, 2006  

Suggested Citation

Acharya, Viral V. and Yorulmazer, Tanju, Too Many to Fail - An Analysis of Time-Inconsistency in Bank Closure Policies. Journal of Financial Intermediation, Forthcoming. Available at SSRN: http://ssrn.com/abstract=925699

Contact Information

Viral V. Acharya (Contact Author)
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Tanju Yorulmazer
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
HOME PAGE: http://www.ny.frb.org/research/economists/yorulmazer/index.html
Feedback to SSRN


Paper statistics
Abstract Views: 649

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.250 seconds