Herding tendencies mean smaller banks won't solve moral hazard issue

minneapolis-fed
Minneapolis Fed

Banks that expect to be bailed out by governments tend to invest in similar ways – making bailouts more likely and potential crises more severe, according to a paper published this week by the Federal Reserve Bank of Minneapolis.

In Too Correlated to Fail, Minneapolis Fed economists VV Chari and Christopher Phelan argue that this herding behaviour is more problematic than bank size. "Policy-makers do not intervene when big banks are threatened simply because those banks are too big. Rather, they

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