Are “too big to fail” banks just different in size? – A study on systemic risk and stand-alone risk

• Published in: International review of financial analysis 2024-05, Vol.93, p.103163, Article 103163
• Main Authors: Li, Zongyuan, Lai, Rose Neng
• Format: Article
• Language: English
• Subjects: Banking regulation; Stand-alone risk; Systemic risk; Too-big-to-fail (TBTF) banks; Too-many-to-fail
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2024.103163

This study shows that investment decisions drive tail risks (i.e., systemic risk and stand-alone tail risk) of TBTF (Too-Big-to-Fail) banks, while financing decisions determine tail risks of non-TBTF banks. After the Dodd-Frank Act, undercapitalized non-TBTF banks continue to gamble for resurrection, and their stand-alone tail risk become more sensitive to funding availability and net-stable-funding-ratio than TBTF banks. We show that implementing a slimmed-down version of TBTF regulations on non-TBTF banks cannot efficiently contain the stand-alone risk of non-TBTF banks and cannot eliminate TBTF privilege. Moreover, non-TBTF banks together generate larger pressure of contagion on the real economy, and they herd more when making financing decisions after the Act. Our findings highlight the need for enhanced regulations on the liability-side of non-TBTF banks. •Investment decisions drive tail risks of too-big-to-fail (TBTF) banks, while financing decisions determine tail risks of non-TBTF banks.•The Dodd Frank Act enlarges the differences between TBTF and non-TBTF banks in terms of their tail risk sensitive to financial constraints and capital sufficiency.•Non-TBTF banks together generate larger pressure of contagion on the real economy than TBTF banks.•It is necessary to set up an independent set of regulations governing non-TBTF banks, rather than a slimmed-down version of TBTF regulations.