Too Big to Fail Perception by Depositors: an empirical investigation

We examine a run from smaller to the largest banks in Brazil during the international financial turmoil in late 2008. Since Brazilian banks had no exposure to subprime securitized loans, the run is an opportunity to observe depositor reaction to a shock that is exogenous to the domestic banking system. Our empirical strategy allows us to disentangle the too big to fail benefit from the other features continuously related to size. Our unique database allows us to observe the behavior of uninsured deposits and of different types of holders of certificates of deposits, such as individuals, institutional investors and non-financial corporations. Taken together, our results are consistent with the idea that depositors ran from the smaller banks to the largest banks because they believed the largest banks were too big to fail. We also find that institutional investors had an important role in inducing the behavior of other depositors during the crisis: banks that had relatively more deposits of institutional investors ex-ante suffered more deposit outflows throughout the crisis.