Contagion Effects of Bank Failures: Evidence from Capital Markets: I. Introduction

It is often suggested that the "contagion" effect of bank failure is one of the main reasons for bank regulation (e.g., Meltzer 1967; Benston 1973; Burns 1974). In this view, bankruptcy of a single bank, especially a large bank, may cause the loss of public confidence in the banking system as a whole and is thus likely to set off runs on other banks.