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Too Correlated to Fail

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  • V. V. Chari
  • Christopher Phelan

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.

Suggested Citation

  • V. V. Chari & Christopher Phelan, 2014. "Too Correlated to Fail," Economic Policy Paper 14-3, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmep:14-3
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    References listed on IDEAS

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    1. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-438, July.
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    1. repec:aeb:wpaper:201607:i:7:y:2016 is not listed on IDEAS
    2. Stelios Arvanitis & Alexandros Louka, 2015. "Martingale Transforms with Mixed Stable Limits and the QMLE for Conditionally Heteroskedastic Models," Working Papers 201508, Athens University Of Economics and Business, Department of Economics.
    3. Charles Nolan & Plutarchos Sakellaris & John D. Tsoukalas, 2016. "Optimal Bailout of Systemic Banks," Working Papers 2016_17, Business School - Economics, University of Glasgow.
    4. Marwan Alzoubi & Ayman Abdalmajeed Alsmadi & Hamad kasasbeh, 2022. "Systemically Important Bank: A Bibliometric Analysis for the Period of 2002 to 2022," SAGE Open, , vol. 12(4), pages 21582440221, December.
    5. Alfred Duncan & Charles Nolan, 2020. "Reform of the UK Financial Policy Committee," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(1), pages 1-30, February.

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