Too Rich to Let Me Fail?

Due to the perception of an implicit public guarantee, Banks too-big-to-fail may charge lower loan rates for the same risk in comparison to other groups of banks. However, empirically identifying such effect is challenging because size has many other advantages to banks besides the implicit guarantee. This paper makes use of the natural experiment represented by the discovery of new and large Brazilian oil reserves to conjecture an increase in the bailout perception of some Brazilian banks (the proposed too-rich- to-let-me-fail argument). It then investigates how the difference in loan pricing behavior across banks of different sizes has changed after the discovery. Results show that the difference of loan rates between medium and large banks decreases after the discovery. One possible explanation is that the conjectured increase in the bail-out perception affects mostly medium banks, which are at the margin to become too-big-to-fail, although other explanations are also feasible.