The Distortive Effects of Too Big To Fail: Evidence from the Danish Market for Retail Deposits

Rajkamal Iyer; Thais Lærkholm Jensen; Niels Johannesen; Adam Francis McSorley Sheridan

doi:10.1093/rfs/hhz037

The Distortive Effects of Too Big To Fail: Evidence from the Danish Market for Retail Deposits

Rajkamal Iyer, Thais Lærkholm Jensen, Niels Johannesen, Adam Francis McSorley Sheridan

Department of Economics

Research output: Contribution to journal › Journal article › Research › peer-review

16 Citations (Scopus)

217 Downloads (Pure)

Abstract

We study the impact of too-big-to-fail (TBTF) guarantees on the market for retail deposits. Exploiting information about all personal deposit accounts in Denmark and salient changes to the deposit insurance limit, we provide evidence that systemically important banks successfully retain and attract uninsured deposits in a crisis at the expense of other banks even as they differentially lower their interest rates. The funding shock suffered by nonsystemic banks causes a decrease in their lending. The results point to the distortive effects of TBTF guarantees in the market for retail deposits.

Original language	English
Journal	The Review of Financial Studies
Volume	32
Issue number	12
Pages (from-to)	4653–4695
ISSN	0893-9454
DOIs	https://doi.org/10.1093/rfs/hhz037
Publication status	Published - 15 Mar 2019

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10.1093/rfs/hhz037

The Distortive Effects of Too Big To Fail: Evidence from the Danish Market for Retail DepositsAccepted author manuscript, 1.74 MB

Cite this

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abstract = "We study the impact of too-big-to-fail (TBTF) guarantees on the market for retail deposits. Exploiting information about all personal deposit accounts in Denmark and salient changes to the deposit insurance limit, we provide evidence that systemically important banks successfully retain and attract uninsured deposits in a crisis at the expense of other banks even as they differentially lower their interest rates. The funding shock suffered by nonsystemic banks causes a decrease in their lending. The results point to the distortive effects of TBTF guarantees in the market for retail deposits.",

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AB - We study the impact of too-big-to-fail (TBTF) guarantees on the market for retail deposits. Exploiting information about all personal deposit accounts in Denmark and salient changes to the deposit insurance limit, we provide evidence that systemically important banks successfully retain and attract uninsured deposits in a crisis at the expense of other banks even as they differentially lower their interest rates. The funding shock suffered by nonsystemic banks causes a decrease in their lending. The results point to the distortive effects of TBTF guarantees in the market for retail deposits.

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