Too Many Banks to Fail? Theory and Evidence

Abstract

The idea of "Too Many to Fail" (hereafter TMTF) is that -- even if the large banks are healthy -- small and medium sized banks can cause a banking crisis if enough of them fail simultaneously. Therefore, it has been argued, containing the risks of "Too Big to Fail" banks (hereafter TBTF) does not address the fundamental cause of systemic banking crises, it just shifts the focus from big banks to smaller ones. We disagree, and show that this line of reasoning is not supported either theoretically or empirically for the US banking system.

Keywords: Too Many to Fail, Too Big to Fail, Bank, Crisis

JEL Classification: G21, G28