Too Big to Fail and Moral Hazard: Evidence from an Epoch of Unregulated Commercial Banking

Thomas Barnebeck Andersen*, Peter Sandholt Jensen

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We analyze the link between “too big to fail” (TBTF) and moral hazard using a natural experiment from an epoch of unregulated commercial banking in Denmark. In 1908 the country faced a large banking shock where the creditors of distressed commercial banks received a bailout by the government for the first time in Danish history. Due to a fortuitous combination of circumstances, banks continued to operate in an unregulated environment for more than a decade after the bailout. By considering a sample from a pre-regulation epoch, we isolate the TBTF effect. Our empirical analysis shows that TBTF banks significantly reduced post-bailout capital ratios compared to other banks.

Original languageEnglish
JournalIMF Economic Review
ISSN2041-4161
DOIs
Publication statusE-pub ahead of print - 6. May 2022

Bibliographical note

Publisher Copyright:
© 2022, International Monetary Fund.

Keywords

  • Banking crisis
  • Creditor bailout
  • Moral hazard
  • Too big to fail

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