Deposit Insurance and Wealth Effects: The Value of Being "Too Big to Fail."
O'Hara, Maureen and
Journal of Finance, 1990, vol. 45, issue 5, 1587-1600
This paper investigates the effect on bank equity values of the Comptroller of the Currency's announcement that some banks were "too big to fail" and that for those banks total deposit insurance would be provided. Using an event study methodology, the authors find positive wealth effects accruing to too-big-to-fail banks, with corresponding negative effects accruing to nonincluded banks. They demonstrate that the magnitude of these effects differed with bank solvency and size. The authors also show that the policy to which the market reacted was that suggested by the Wall Street Journal and not that actually intended by the Comptroller. Copyright 1990 by American Finance Association.
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