What lies behind the “too-small-to-survive” banks?

Theoharry Grammatikos and Nikolaos Papanikolaou ()

MPRA Paper from University Library of Munich, Germany

Abstract: It is a common place that during financial crises, like the one started in 2007, authorities provide substantial financial support to some problem banks, whilst at the same time let several others to go bankrupt. Is this happening because some particular banks are considered important and big enough to save, whereas some others are perceived as being ‘Too-Small-To-Survive’? Is the size of banks the fundamental factor that makes authorities to treat them differently, or it is also that some banks perform poorly and are not capable of withstanding some considerable shocks whatsoever? Our study provides concrete answers to these questions thus filling part of the void in the existing literature. A short- and a long-run positive relationship between size and performance is documented regardless of the level of bank soundness (healthy vs. failed and assisted banks) under scrutiny. Importantly, we pose and lend support to the ‘Too-Small-To-Survive’ hypothesis according to which the impact of bank performance on failure probability strongly depends on size. Evidence shows that authorities tend not to save banks whose size is below some specific threshold.

Keywords: CAMEL ratings; financial crisis; bank size; ‘Too-Small-To-Survive’ banks (search for similar items in EconPapers)
JEL-codes: C23 D02 G01 G21 (search for similar items in EconPapers)
Date: 2013-11, Revised 2013-11
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Related works:
Working Paper: What lies behind the (Too-Small-To-Survive) banks? (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:51431

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