Size-Based Regulation and Bank Fragility: Evidence from the Wells Fargo Asset Cap
69 Pages Posted: 21 Feb 2024 Last revised: 30 Oct 2024
Date Written: February 21, 2024
Abstract
We argue that heightened regulation on large banks contributed to the rise in fragility of smaller banks revealed by the 2023 regional bank crisis. In 2018, regulators restricted Wells Fargo, the third largest U.S. bank, from growing its total assets. We estimate this asset cap led Wells Fargo to give up deposits amounting to 2.2% of aggregate bank deposits. These deposits, primarily uninsured, were reallocated to smaller, less regulated banks geographically proximate to Wells Fargo. In turn, these banks experienced higher deposit outflows once monetary tightening commenced and saw their stock prices plummet during the 2023 stress.
Keywords: Too-Big-to-Fail, Banking Fragility, Wells Fargo, Asset Cap, Regional Bank Crisis, Monetary Tightening
JEL Classification: G01, G21, G28, G32, E44, E58
Suggested Citation: Suggested Citation