Deposit Insurance and Wealth Effects: The Value of Being “Too Big to Fail”

Authors

  • MAUREEN O'HARA,

  • WAYNE SHAW

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    • Both authors from Johnson Graduate School of Management, Cornell University. We would like to thank William Grant of the Office of the Comptroller of the Currency and Patrick Mahoney of the Federal Reserve System for their assistance. We also gratefully acknowledge the assistance of two anonymous referees.


ABSTRACT

This paper investigates the effect on bank equity values of the Comptroller of the Currency's announcement that some banks were “too big to fail” and that for those banks total deposit insurance would be provided. Using an event study methodology, we find positive wealth effects accruing to TBTF banks, with corresponding negative effects accruing to non-included banks. We demonstrate that the magnitude of these effects differed with bank solvency and size. We also show that the policy to which the market reacted was that suggested by the Wall Street Journal and not that actually intended by the Comptroller.

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