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

Rajkamal Iyer1; Thais Lærkholm Jensen2; Niels Johannesen3; Adam Sheridan3

1 Imperial College London · 2 University of Copenhagen and Danmarks Nationalbank · 3 University of Copenhagen and CEBI

Review of Financial Studies 2019 open access

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. Received March 15, 2018; editorial decision January 15, 2019 by Philip Strahan.

DOI
10.1093/rfs/hhz037
Volume
32 (12)
Pages
4653-4695
Language
en
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