Research Insights: Tradeoffs in too-big-to-fail bank regulations

In the wake of the Global Financial Crisis of 2008, regulators strengthened oversight of banks considered “too big to fail” because their distress could threaten the broader financial system. The Basel Committee subsequently introduced a framework for identifying Domestic Systemically Important Banks (D-SIBs), which are subject to higher capital requirements and enhanced supervisory scrutiny. The framework has since been implemented in more than 20 jurisdictions worldwide.

Although higher capital buffers and regulatory oversight can reduce risk-taking, a potential unintended consequence of systemic-importance designation is moral hazard. Such a designation may reinforce perceptions that these banks are too big to fail. If banks and their borrowers perceive stronger implicit government support following designation, banks may have weaker incentives to monitor loans and manage risk. This issue is particularly important in emerging markets, where market imperfections make bank monitoring critical for loan performance.

Sriniwas Mahapatro, assistant professor of accounting, examines this question with Shashwat Agrawal, Nishant Kashyap, and Prasanna Tantri in “Systemically Important Banks and Loan Performance: Evidence from India,” published in Management Science (October 2026).

Using granular loan-level data and information on corporate borrowers’ loan performance, along with a staggered difference-in-differences research design, they find that loan performance deteriorates after banks are designated as D-SIBs. The evidence points to bank-level moral hazard: following designation, D-SIBs reduce post-origination monitoring and weaken loan-recovery efforts. Borrowers respond with poorer financial health and repayment behavior, particularly on loans from D-SIBs. 

Says Mahapatro, “The findings highlight an important trade-off in too-big-to-fail regulation: policies designed to make systemically important banks safer can also weaken monitoring incentives of banks and affect borrower behavior.”

View the paper published by Management Science in October 2026, “Systematically important banks and loan performance: Evidence from India.”

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