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What lies behind the “too-small-to-survive” banks?

  • Grammatikos, Theoharry
  • Papanikolaou, Nikolaos I.

It is a common place that during financial crises, like the one started in 2007, authorities provide substantial financial support to some problem banks, whilst at the same time let several others to go bankrupt. Is this happening because some particular banks are considered important and big enough to save, whereas some others are perceived as being ‘Too-Small-To-Survive’? Is the size of banks the fundamental factor that makes authorities to treat them differently, or it is also that some banks perform poorly and are not capable of withstanding some considerable shocks whatsoever? Our study provides concrete answers to these questions thus filling part of the void in the existing literature. A short- and a long-run positive relationship between size and performance is documented regardless of the level of bank soundness (healthy vs. failed and assisted banks) under scrutiny. Importantly, we pose and lend support to the ‘Too-Small-To-Survive’ hypothesis according to which the impact of bank performance on failure probability strongly depends on size. Evidence shows that authorities tend not to save banks whose size is below some specific threshold.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 51431.

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Date of creation: Nov 2013
Date of revision: Nov 2013
Handle: RePEc:pra:mprapa:51431
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