While the deposits typically are insured up to a certain level, economic history shows that more often than not the ultimate costs of paying off all deposits fall on the sovereign, especially in the case of large, complex and inter-connected banks. Capital constraints at a wider, systemic level also impact the resolution of weak banks.
The United States experience, empirically documented by Granja, Matvos and Seru (2017), shows that an optimal bidding strategy of a healthier bank – a potential acquirer, which may value the weaker bank for its franchise value from deposits, gets adversely impacted if it is itself poorly capitalized. In such a scenario, the overall value realization for the weak bank goes down.