The Distortive Effects of Too Big To Fail: Evidence from the Danish Market for Retail Deposits

52 Pages Posted: 22 May 2016 Last revised: 10 Apr 2019

See all articles by Rajkamal Iyer

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Thais Jensen

Independent

Niels Johannesen

University of Copenhagen

Adam Sheridan

University of Copenhagen

Date Written: November 1, 2018

Abstract

We study the impact of too big to fail (TBTF) guarantees on bank competition for retail deposits. Exploiting information about all personal deposit accounts in Denmark and salient changes to the deposit insurance limit, we provide evidence that systemically important banks successfully retain and attract uninsured deposits in a crisis at the expense of other banks even as they differentially lower their interest rates. The funding shock suffered by non-systemic banks causes a decrease in their lending. The results point to distortive effects of TBTF guarantees in the market for retail deposits.

Keywords: Too Big To Fail, Deposit insurance, Implicit guarantees, Banks

JEL Classification: D12, G21, G28, O16

Suggested Citation

Iyer, Rajkamal and Jensen, Thais and Johannesen, Niels and Sheridan, Adam, The Distortive Effects of Too Big To Fail: Evidence from the Danish Market for Retail Deposits (November 1, 2018). Forthcoming in The Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2780073 or http://dx.doi.org/10.2139/ssrn.2780073

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Thais Jensen

Independent ( email )

No Address Available

Niels Johannesen

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

Adam Sheridan (Contact Author)

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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