Abstract:
This dissertation examines a linchpin of federal banking policy, the Federal Deposit
Insurance Corporation (FDIC). The main function of the FDIC is to provide absolute
guarantees on insured deposits up to a set limit. This amounts to a federal subsidy for
banks, and the greater risks banks assume, the greater the amount of the subsidy.
Attempts by policy makers to undue the undesirable aspects of the subsidy have
succeeded in limiting the extent of coverage to small banks but have codified into law
that the largest banking institutions are considered “too big to fail” (TBTF). This special
status granted to TBTF banks confers upon them a funding advantage not available to
their smaller competitors. This imbalance creates an incentive for banks to merge in
order to create a bank considered TBTF, or for existing TBTF banks to purchase smaller
banks; in either event the purpose is to capture the gains from the too big to fail status.
This potential cause of bank mergers has only recently begun to enter the banking
literature and has yet to be formerly tested. The purpose of this dissertation is to both
layout the economic theory and to test empirically the role of too big to fail status in bank
merger activity.
