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Too Rich to Let Me Fail?

Author

Listed:
  • Bruno Martins

    (Banco Central do Brasil)

  • Ricardo Schechtman

    (Banco Central do Brasil)

Abstract

Due to the perception of an implicit public guarantee, Banks too-big-to-fail may charge lower loan rates for the same risk in comparison to other groups of banks. However, empirically identifying such effect is challenging because size has many other advantages to banks besides the implicit guarantee. This paper makes use of the natural experiment represented by the discovery of new and large Brazilian oil reserves to conjecture an increase in the bailout perception of some Brazilian banks (the proposed too-rich- to-let-me-fail argument). It then investigates how the difference in loan pricing behavior across banks of different sizes has changed after the discovery. Results show that the difference of loan rates between medium and large banks decreases after the discovery. One possible explanation is that the conjectured increase in the bail-out perception affects mostly medium banks, which are at the margin to become too-big-to-fail, although other explanations are also feasible.

Suggested Citation

  • Bruno Martins & Ricardo Schechtman, 2013. "Too Rich to Let Me Fail?," Documentos de Investigación - Research Papers 13, CEMLA.
    • Handle: RePEc:cml:docinv:13
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    More about this item

    Keywords

    too-big-to-fail; loan pricing; oil discovery;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G3 - Financial Economics - - Corporate Finance and Governance

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