Survival of the Biggest: Large Banks & Financial Crises

“The new data allow us to investigate banking industry structure and bank-level dynamics before, during, and after banking crises.””We show that a country’s largest banks (i.e., the top-5 by assets) typically gain market share in crises, as small banks fail more often or are absorbed, making the largest banks even more dominant after crises. This is despite the fact that the largest banks tend to take more risk before crises, suffer greater equity losses in crises, and contract their lending more.””Instead, the survival and expansion of the largest banks appear linked both to substantially higher rates of government rescues and to the fact that their deposit flows are more insensitive to bank losses, compared to smaller banks.””We find no evidence that large-bank-dominated systems have lower crisis frequency; in fact, conditional on crises, large-bank-dominated systems see more severe economic outcomes.”

This paper took 8 years to compile 150 years worth of banking data. It found that large banks become more dominant after crises despite suffering greater losses primarily due to government rescues. Furthermore, a large-bank-dominated system leads to more severe economic outcomes.

— Sam Callahan (@samcallah) October 10, 2023

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