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Too Big to Fail and Moral Hazard: Evidence from an Epoch of Unregulated Commercial Banking

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  • Thomas Barnebeck Andersen

    (University of Southern Denmark)

  • Peter Sandholt Jensen

    (Linnaeus University)

Abstract

We analyze the link between “too big to fail” (TBTF) and moral hazard using a natural experiment from an epoch of unregulated commercial banking in Denmark. In 1908 the country faced a large banking shock where the creditors of distressed commercial banks received a bailout by the government for the first time in Danish history. Due to a fortuitous combination of circumstances, banks continued to operate in an unregulated environment for more than a decade after the bailout. By considering a sample from a pre-regulation epoch, we isolate the TBTF effect. Our empirical analysis shows that TBTF banks significantly reduced post-bailout capital ratios compared to other banks.

Suggested Citation

  • Thomas Barnebeck Andersen & Peter Sandholt Jensen, 2022. "Too Big to Fail and Moral Hazard: Evidence from an Epoch of Unregulated Commercial Banking," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(4), pages 808-830, December.
    • Handle: RePEc:pal:imfecr:v:70:y:2022:i:4:d:10.1057_s41308-022-00167-7
    DOI: 10.1057/s41308-022-00167-7
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    More about this item

    Keywords

    Banking crisis; Creditor bailout; Too big to fail; Moral hazard;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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