TBTF Effects on Banks Herding and Risk-taking Behavior

Document Type : Research Paper


1 Faculty of Economics, University of Tehran

2 Ph.D. Candidate of Economics, Tehran University, Faculty of Economics, Tehran, Iran


One of the characteristics of the banking industry is the inevitable effects of a bank's behavior on other banks (domino effect), and due to the incomplete and asymmetric information of financial sector actors, central bank, banks and customers, phenomena such as "herd behavior" and "Informational cascade", which affect the willingness of institutions to risky behavior, are likely among the financial institutions. TBTF, "too big to fail", as one of the characteristics of financial institutions, also affects the occurrence of phenomena such as herding. To ensure financial stability, central banks need to study the effective factors and the process of their impacts on the risky behavior of banks, taking into account the characteristics of the banking industry. In this paper, the effect of TBTF problem on the occurrence of herding and its resulting risky behavior has been investigated; the existence of TBTF reduces the probability of safe herd behaviors, increases the likelihood of epidemic risky behaviors, and thus increases the likelihood of financial crisis.In this case, increasing the number of banks will also increase the likelihood of occurrence financial crisis.
JEL Classification: E58, G28,G21


Main Subjects

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Volume 54, Issue 3 - Serial Number 128
September 2019
Pages 579-606
  • Receive Date: 30 June 2018
  • Revise Date: 06 March 2019
  • Accept Date: 30 April 2019
  • First Publish Date: 23 August 2019