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

Thomas Barnebeck Andersen () and Peter Jensen
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Thomas Barnebeck Andersen: University of Southern Denmark

IMF Economic Review, 2022, vol. 70, issue 4, No 6, 808-830

Abstract: 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.

Keywords: Banking crisis; Creditor bailout; Too big to fail; Moral hazard (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 N24 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1057/s41308-022-00167-7

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