Are “too big to fail” banks just different in size? – A study on systemic risk and stand-alone risk

Zongyuan Li () and Rose Neng Lai

International Review of Financial Analysis, 2024, vol. 93, issue C

Abstract: This study shows that investment decisions drive tail risks (i.e., systemic risk and stand-alone tail risk) of TBTF (Too-Big-to-Fail) banks, while financing decisions determine tail risks of non-TBTF banks. After the Dodd-Frank Act, undercapitalized non-TBTF banks continue to gamble for resurrection, and their stand-alone tail risk become more sensitive to funding availability and net-stable-funding-ratio than TBTF banks. We show that implementing a slimmed-down version of TBTF regulations on non-TBTF banks cannot efficiently contain the stand-alone risk of non-TBTF banks and cannot eliminate TBTF privilege. Moreover, non-TBTF banks together generate larger pressure of contagion on the real economy, and they herd more when making financing decisions after the Act. Our findings highlight the need for enhanced regulations on the liability-side of non-TBTF banks.

Keywords: Stand-alone risk; Systemic risk; Banking regulation; Too-big-to-fail (TBTF) banks; Too-many-to-fail (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:93:y:2024:i:c:s1057521924000954

DOI: 10.1016/j.irfa.2024.103163

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