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 language | English |
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Journal | IMF Economic Review |
Volume | 70 |
Issue number | 4 |
Pages (from-to) | 808-830 |
ISSN | 2041-4161 |
DOIs | |
Publication status | Published - Dec 2022 |
Bibliographical note
Publisher Copyright:© 2022, International Monetary Fund.
Keywords
- Banking crisis
- Creditor bailout
- Moral hazard
- Too big to fail