The recent global financial crisis has raised important questions about governments'"too big to fail" policies and their potential impact on bank risk-taking. It is now clear thatcertain banks in almost all countries are considered to be too big to fail and will receivetaxpayer-funded bailouts if failure appears imminent. An important question that arises iswhether larger banks, that enjoy this status, have in fact taken on more risk than their smallercounterparts who face much more credible threats of wind-up or bankruptcy should they get intofinancial difficulty. This study confirms that larger banks take on higher levels of risk than smaller ones andthis finding persists when returns are measured before interest and taxes. The higher risk levelsare driven by the lower capital to assets ratios and higher variances in return on assets of thelarger banks. There is some evidence that large banks also generate higher returns on assets. The findings will be of interest to regulators and central banks since they can potentiallycontribute to better allocation of supervisory resources and more appropriate interventionstrategies, such as requiring these riskier large banks to hold higher levels of capital or to payadditional taxes as has been proposed by the International Monetary Fund. This study appearsto be the first using this methodology on a sample of banks that ranges from the very smallest tothe very largest and includes both publicly-traded and privately-owned institutions.

Academy of Banking Studies Journal
Sprott School of Business

Stan, M. (Mitchell), & McIntyre, M. (2012). Too big to fail? Size and risk in banking. Academy of Banking Studies Journal, 11(2), 11–22.