Too many to fail? evidence of regulatory forbearance when the banking sector is weak. Review of Financial Studies 24:1378–405

This article studies bank failures in twenty-one emerging market countries in the 1990s. By using a competing risk hazard model for bank survival, we show that a government is less likely to take over or close a failing bank if the banking system is weak. This Too-Many-to-Fail effect is robust to controlling for macroeconomic factors, financial crises, the Too-Big-to-Fail effect, domestic financial development, and concerns due to systemic risk and information spillovers. The article also shows that the Too-Many-to-Fail effect is stronger for larger banks and when there is a large government budget deficit. (JEL E58, F30, G21, G28) Banking is a very important part of a free-market economy. Yet exit from the sector is not governed by market forces alone. An insolvent bank can continue to operate by issuing new deposits to pay old liabilities until government regulators decide to intervene. Hence, the timing and the quality of regulatory intervention are important factors in maintaining a healthy financial system and economy. In principle, the government can always close a failing bank as soon as th