What lies behind the “too-small-to-survive” banks?

Grammatikos, Theoharry and Papanikolaou, Nikolaos I. (2013): What lies behind the “too-small-to-survive” banks? Published in: Luxembourg School of Finance Research Working Paper Series No. 13-12 (November 2013)

Abstract

It is a common place that during financial crises, like the one started in 2007, authorities provide substantial financial support to some problem banks, whilst at the same time let several others to go bankrupt. Is this happening because some particular banks are considered important and big enough to save, whereas some others are perceived as being ‘Too-Small-To-Survive’? Is the size of banks the fundamental factor that makes authorities to treat them differently, or it is also that some banks perform poorly and are not capable of withstanding some considerable shocks whatsoever? Our study provides concrete answers to these questions thus filling part of the void in the existing literature. A short- and a long-run positive relationship between size and performance is documented regardless of the level of bank soundness (healthy vs. failed and assisted banks) under scrutiny. Importantly, we pose and lend support to the ‘Too-Small-To-Survive’ hypothesis according to which the impact of bank performance on failure probability strongly depends on size. Evidence shows that authorities tend not to save banks whose size is below some specific threshold.

• Item Type: MPRA Paper
• Language: English
• Keywords: CAMEL ratings; financial crisis; bank size; ‘Too-Small-To-Survive’ banks
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, Operations, and Impact; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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