‘Too big to fail’: Effects on competition and implications for banking supervision
| Published date | 01 April 2001 |
| Date | 01 April 2001 |
| Pages | 361-372 |
| DOI | https://doi.org/10.1108/eb025089 |
| Author | Michael Wolgast |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 9 Number 4
`Too big to fail': Effects on competition and
implications for banking supervision
Michael Wolgast
Received: 12th June, 2001
German Insurance Association (GDV), Friedrichstrasse 191, D-10117 Berlin, Germany;
e-mail: m. wolgast@gdv. org
Dr Michael Wolgast is chief economist and
head of the Economics department at the
German Insurance Association (Gesamtver-
band der Deutschen Versicherungswirt-
schaft (GDV)) in Berlin. Before taking up his
current position, he worked as Senior Econ-
omist at Deutsche Bank Research in Frank-
furt and as an economist for the Federal
Ministry of Economic Affairs in Bonn and for
the German Savings Banks' Association.
Michael Wolgast graduated with a mat-
trise d'economie appliquee from Paris-IX-
Dauphine and with a Master's degree in
Economics from the London School of Eco-
nomics and Political Science. He took his
doctorate at Kiel University.
This paper was essentially written in
June 2001, while the author was still work-
ing for Deutsche Bank.
ABSTRACT
Despite a raft of important qualitative reserva-
tions and at best poor empirical evidence, the
argument that, in case of business problems,
large banks are more likely to be bailed out by
government intervention than smaller banks
('too big to fail') cannot be dismissed entirely.
The question, though, is whether or to what
extent this has any implications for competition
or the stability of the banking system.
Under realistic assumptions, especially with
respect
to incentives
for bank management
and
shareholders, too big to fail hardly leads to
excessive
risk taking by large banks.
The impact of too big to fail on a bank's
rating and, accordingly, its refinancing condi-
tions is only marginal, as a breakdown of the
various rating components clearly documents.
This suggests that the effects on competition of
too big to fail come nowhere close to the refi-
nancing advantages enjoyed by public sector
banks in Germany.
The refinancing advantage of the Landes-
banken afforded by state guarantees (Anstalts-
last and Gewährträgerhaftung) comes to as
much as 50 basis points. Given the continual
narrowing of lending margins, an advantage on
this scale plays a decisive role in competition.
Too big to fail has substantial implications
for the architecture
of banking supervision. Sui-
table institutional arrangements
need to be cre-
ated in order to deal with large banks in case
of
a, potentially systemic, crisis. With banking
becoming
increasingly
global and the number of
cross-border
mergers on the rise, this requires
solutions at an international, if not at a global,
level.
Implementing the concept of a European
Liko-Bank, as suggested
by the Bundesbank,
will require that the supervisory authorities and
the European System of Central Banks
(ESCB) first create appropriate public sector
counterparts.
INTRODUCTION
Since the 1980s, starting in the USA, there
has been discussion on the potential conse-
quences of the fact that some banks may
Journal of Financial Regulation
and Compliance, Vol. 9, No. 4,
2001, pp. 361-372
© Henry Stewart Publications,
1358-1988
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