Determining Size Thresholds for the 'Too-Small-To-Survive' and the 'Too-Big-To-Fail' Banks

In the recent crisis, the U.S. authorities bailed out numerous banks, while let many others to fail as going concern entities. Even though both interventions fully protect depositors, a bail out represents an implied subsidy to shareholders, which is not yet the case with closures where creditors are not subsidised. We investigate this non-uniform policy, demonstrating that size and not performance is the decision variable that endogenously determines one threshold below which banks are treated as ‘Too-Small-To-Survive' by regulators and another one above which are considered to be ‘Too-Big-To-Fail'