Too big to fail: Some empirical evidence on the causes and consequences of public banking interventions in the UK

During the 2007-09 financial crisis, the banking sector received an extraordinary level of public support. In this empirical paper, we examine the determinants of a number of public sector interventions: government funding or central bank liquidity insurance schemes, public capital injections, and nationalizations. We use bank-level data spanning all British and foreign banks operating within the United Kingdom. We use multinomial logit regression techniques and find that a bank's size, relative to the size of the entire banking system, typically has a large positive and non-linear effect on the probability of public sector intervention for a bank. We also use instrumental variable techniques to show that British interventions helped: there is fragile evidence that the wholesale (non-core) funding of an affected institution increased significantly following capital injection or nationalization. (C) 2012 Bank of England. Published by Elsevier Ltd. All rights reserved.