Are Banks Too Big to Fail or Too Big to Save?
Banks, financial institutions, and even big corporations that have their weight in the national economy may sometimes be subjected to adversities that require them to make tough decisions to maintain their viability. However, at times, this proves challenging with no way out. In such cases, and given the positive contribution that these corporations or institutions have had on the economy and since they are considered as one of the key players whose demise may lead to national economic or financial crisis, countries opt for rescuing them through specially designed packages. Here, you will learn more about the "too big to fail" notion within the banking sector and when countries rescue banks. What are the criteria drawn by the United States to rescue struggling banks? Is any bank eligible for rescuing?
In this section, we will examine how bank size, in absolute terms and relative to the national economy, potentially affects bank valuation and CDS pricing on account of differential access to the financial safety net subsidies. We first discuss our tests of whether banks are too big too fail and too big to save. Then we present our main empirical results, followed by some robustness checks.