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Should Large Banks Be Allowed to Fail?

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  • Mayer, Thomas

Abstract

The question of whether large banks should be allowed to fail brings us face to face with a conflict between two social goals. On the one hand, the goal of optimal resource allocation suggests that even very large banks, like other firms, should be allowed to fail. On the other hand, the stabilization goal suggests that, given the present institutional structure, failures of large banks should be prevented lest they lead to runs on other banks and to a significant reduction in the money stock. The solution suggested here for this conflict is small changes in the institutional structure.

Suggested Citation

  • Mayer, Thomas, 1975. "Should Large Banks Be Allowed to Fail?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(4), pages 603-610, November.
    • Handle: RePEc:cup:jfinqa:v:10:y:1975:i:04:p:603-610_01
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    Cited by:

    1. Walter A. Varvel & John R. Walter, 1976. "FDIC policy toward bank failures," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 3-12.
    2. Brian Smith & Robert W. White, 1988. "The Deposit Insurance System in Canada: Problems and Proposals for Change," Canadian Public Policy, University of Toronto Press, vol. 14(4), pages 331-346, December.
    3. Phil Molyneux & Klaus Schaeck & Tim Zhou, 2011. "‘Too Systemically Important to Fail’ in Banking," Working Papers 11011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    4. Siegert, Casper & Willison, Matthew, 2015. "Financial Stability Paper 32: Estimating the extent of the ‘too big to fail’ problem – a review of existing approaches," Bank of England Financial Stability Papers 32, Bank of England.
    5. Molyneux, Philip & Schaeck, Klaus & Zhou, Tim Mi, 2014. "‘Too systemically important to fail’ in banking – Evidence from bank mergers and acquisitions," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 258-282.

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