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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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