Too Correlated to Fail

Varadarajan Chari and Christopher Phelan

No 14-3, Economic Policy Paper from Federal Reserve Bank of Minneapolis

Abstract: In this paper, we argue that the anticipation of bailouts creates incentives for banks to herd in the sense of making similar investments. This herding behavior makes bailouts more likely and potential crises more severe. Analyses of bailouts and moral hazard problems that focus exclusively on bank size are therefore misguided in our view, and the policy conclusion that limits on bank size can effectively solve moral hazard problems is unwarranted.

Pages: 8 pages
Date: 2014-07-22
New Economics Papers: this item is included in nep-ban and nep-cta
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Citations: View citations in EconPapers (6)

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