Impact of Bank Failure is Sometimes Greater Than the Sum of its Parts
Staff at the Research and Statistics Division of the Federal Reserve Board recently published a working paper examining whether financial stress at small banks has a different impact on the real economy than financial stress at larger banks.
The working paper estimates that the failure of a single large banking organization with an assumed $100 billion in deposits would result in approximately a 107 percent decline in quarterly real GDP growth, whereas stress among five smaller banking organizations—each with an assumed $20 billion in deposits—would result in roughly a 22 percent decline in quarterly real GDP growth.
The paper is an important contribution to the research on the connection between bank size and systemic risk. The findings of the paper are critical to keep in mind as federal regulators seek to tailor regulations applicable to large and small banks while limiting potential damage to the economy in future financial crises.