| The Too Big To Fail Doctrine is examined in bank failures from 1985-1994. The term 'Too Big To Fail' (TBTF) originated in 1984 with the Continental Illinois failure. TBTF formally introduced the concept that the treatment of a commercial bank in financial distress would be based, at least partly, on its size. This concept was further clarified in 1988 when L. William Seidman, then Chair of the Federal Deposit Insurance Corporation (FDIC), stated that no bank was too large to fail but some banks were too large for any of their depositors to lose money. Thus he differentiated the treatment of uninsured depositors on the basis of the size of the failed bank. We use Public Choice Economic theories to develop our model of the choice made by FDIC, particularly theories involving bureaucracies, interest groups, individual utility functions, regulations and voting, taking into consideration two landmark banking laws, FIRREA and FDICIA. The logit econometric technique is used to test twenty variables in time periods delineated by FIRREA and FDICIA. In addition, we construct a test for voting bias of specific Board members. This test does not rely on knowledge of the individual voting results. Our empirical results disclose evidence of bias in the voting of the FDIC Chair prior to the passage of FIRREA in 1989. When we test our proxy for the size of a bank, we find that the impact of the variable changes over time. Between 1985 and 1989 the variable is statistically significant and positive, indicating the existence of a TBTF Doctrine. However size becomes statistically insignificant between the enactment of FIRREA (1989) and the enactment of FDICIA in 1991. After FDICIA size is again statistically significant but the sign of the partial first derivative changes to negative, that is, after FDICIA, owners of uninsured deposits in smaller banks are favoured. The most consistent variable is the relative level of core deposits in the failed bank. The higher the level of core deposits the more likely the uninsured deposits are treated as insured deposits. The sign of core is independent of the time period. |