EconPapers    
Economics at your fingertips  
 

Too many to fail - an analysis of time-inconsistency in bank closure policies

Viral Acharya and Tanju Yorulmazer

Bank of England working papers from Bank of England

Abstract: While the ‘too-big-to-fail’ guarantee is explicitly a part of bank regulation in many countries, this paper shows that bank closure policies also suffer from an implicit ‘too-many-to-fail’ problem: when the number of bank failures is large, the regulator finds it ex-post optimal to bail out some or all failed banks, whereas when the number of bank failures is small, failed banks can be acquired by the surviving banks. This gives banks incentives to herd and increases the risk that many banks may fail together. The ex-post optimal regulation may thus be time-inconsistent or suboptimal from an ex-ante standpoint. In contrast to the too-big-to-fail problem which mainly affects large banks, we show that the too-many-to-fail problem affects small banks more by giving them stronger incentives to herd.

Date: 2007-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (412)

Downloads: (external link)
http://www.bankofengland.co.uk/research/Documents/workingpapers/2007/WP319.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.bankofengland.co.uk/research/Documents/workingpapers/2007/WP319.pdf [301 Moved Permanently]--> https://www.bankofengland.co.uk/research/Documents/workingpapers/2007/WP319.pdf)

Related works:
Journal Article: Too many to fail--An analysis of time-inconsistency in bank closure policies (2007) Downloads
Working Paper: Too Many to Fail - An Analysis of Time Inconsistency in Bank Closure Policies (2004) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:319

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().

 
Page updated 2025-03-30
Handle: RePEc:boe:boeewp:319