Post-Resolution Treatment of Depositors at Failed Banks: Implications for the Severity of Banking Crises, Systemic Risk, and Too-Big-To-Fail
Bank failures are widely viewed in all countries as more damaging to the economy than the failure of other firms of similar size for a number of reasons. The failures may produce losses to depositors and other creditors, break long-standing bank-customers loan relationships, disrupt the payments system, and spillover in domino fashion to other banks, financial institutions and markets, and even to the macroeconomy (Kaufman, 1996). Thus, bank failures are viewed as potentially more likely to involve contagion or systemic risk than the collapse of other firms.
The risk of such actual or perceived damage is often a popular justification for explicit or implicit government-provided or sponsored safety nets under banks, including explicit deposit insurance and implicit government guarantees, such as "too-big-to-fail" (TBTF), that may protect de jure uninsured depositors and possibly other bank stakeholders against some or all of the loss.