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The social costs and benefits of too-big-to-fail banks: A “bounding” exercise

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  • Boyd, John H.
  • Heitz, Amanda

Abstract

While the policy of too-big-to-fail has received wide attention in the literature, there is little agreement regarding economies of scale for financial firms. We take the stand that systemic risk increases when the larger players in the financial sector have a larger share of output. Calculations indicate that the cost to the macro-economy due to increased systemic risk is always much larger than the potential benefit due to scale economies. When distributional and intergenerational issues are considered, the potential benefits to economies of scale are unlikely to ever exceed the potential costs due to increased risk of a banking crisis.

Suggested Citation

  • Boyd, John H. & Heitz, Amanda, 2016. "The social costs and benefits of too-big-to-fail banks: A “bounding” exercise," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 251-265.
  • Handle: RePEc:eee:jbfina:v:68:y:2016:i:c:p:251-265
    DOI: 10.1016/j.jbankfin.2016.03.006
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    More about this item

    Keywords

    Financial crisis; Financial intermediation; Banking;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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