Discussion Paper
Too Correlated to Fail
Abstract: In this paper, we argue that the anticipation of bailouts creates incentives for banks to herd in the sense of making similar investments. This herding behavior makes bailouts more likely and potential crises more severe. Analyses of bailouts and moral hazard problems that focus exclusively on bank size are therefore misguided in our view, and the policy conclusion that limits on bank size can effectively solve moral hazard problems is unwarranted.
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Bibliographic Information
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Economic Policy Paper
Publication Date: 2014-07-22
Number: 14-3