Too big to fail

This article is about a theory in economics. For the legal designation, see Systemically important financial institution. For the book, see Too Big to Fail (book). For the film, see Too Big to Fail (film).

Headquarters of AIG, an insurance company rescued by the United States government during the subprime mortgage crisis

"Too big to fail" (TBTF) is a theory in banking and finance that asserts that certain corporations, particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system, and therefore should be supported by government when they face potential failure.[1] The colloquial term "too big to fail" was popularized by U.S. Congressman Stewart McKinney in a 1984 Congressional hearing, discussing the Federal Deposit Insurance Corporation's intervention with Continental Illinois.[2] The term had previously been used occasionally in the press,[3] and similar thinking had motivated earlier bank bailouts.[4]

The term emerged as prominent in public discourse following the global financial crisis of 2007–2008.[5][6] Critics see the policy as counterproductive and that large banks or other institutions should be left to fail if their risk management is not effective.[7][8] Some critics, such as economist Alan Greenspan, believe that such large organizations should be deliberately broken up: "If they're too big to fail, they're too big."[9] Some economists such as Paul Krugman hold that financial crises arise principally from banks being under-regulated rather than their size, using the widespread collapse of small banks in the Great Depression to illustrate this argument.[10][11][12][13]

In 2014, the International Monetary Fund and others said the problem still had not been dealt with.[14][15] While the individual components of the new regulation for systemically important banks (additional capital requirements, enhanced supervision and resolution regimes) likely reduced the prevalence of TBTF, the fact that there is a definite list of systemically important banks considered TBTF has a partly offsetting impact.[16]

  1. ^ Lin, Tom C. W. (April 16, 2012). "Too Big to Fail, Too Blind to See". SSRN 2040921.
  2. ^ Dash, Eric (June 20, 2009). "If It's Too Big to Fail, Is It Too Big to Exist?". New York Times. Retrieved June 22, 2009.
  3. ^ Stern, Gary H.; Feldman, Ron J. (2004). Too big to fail: the hazards of bank bailouts. Brookings Institution Press. ISBN 978-0-8157-8152-3.
  4. ^ Nurisso, George; Prescott, Edward S. (October 18, 2017). "The 1970s Origins of Too Big to Fail". Economic Commentary (2017–17). Federal Reserve Bank of Cleveland: 1–6. doi:10.26509/frbc-ec-201717.
  5. ^ Turner, Adair. "Too Much 'Too Big to Fail'?" Economist's View. September 2, 2010.
  6. ^ "What is too big to fail? definition and meaning". Businessdictionary.com. Archived from the original on March 20, 2019. Retrieved April 27, 2013.
  7. ^ "Banks 'Too Big to Fail'? Wrong". BusinessWeek. Archived from the original on February 20, 2009.
  8. ^ Charles G. Leathers; J. Patrick Raines; Benton E. Gup; Joseph R. Mason; Daniel A. Schiffman; Arthur E. Wilmarth Jr.; David Nickerson; Ronnie J. Phillips; Marcello Dabós; George G. Kaufman; Joe Peek; James A. Wilcox; Chris Terry; Rowan Trayler; Steven A. Seelig; Júlia Király; Éva Várhegyi; Adrian van Rixtel; et al. (December 30, 2003). Benton E. Gup (ed.). Too Big to Fail: Policies and Practices in Government Bailouts. Westport, Connecticut: Praeger Publishers. p. 368. ISBN 978-1-56720-621-0. OCLC 52288783. Retrieved February 20, 2008. The doctrine of laissez-faire seemingly has been revitalized as Republican and Democratic administrations alike now profess their firm commitment to policies of deregulation and free markets in the new global economy. — Usually associated with large bank failures, the phrase too big to fail, which is a particular form of government bailout, actually applies to a wide range of industries, as this volume makes clear. Examples range from Chrysler to Lockheed Aircraft and from New York City to Penn Central Railroad. Generally speaking, when a government considers a corporation, an organization, or an industry sector too important to the overall health of the economy, it does not allow it to fail. Government bailouts are not new, nor are they limited to the United States. This book presents the views of academics, practitioners, and regulators from around the world (e.g., Australia, Hungary, Japan, Europe, and Latin America) on the implications and consequences of government bailouts.
  9. ^ "Greenspan Says U.S. Should Consider Breaking Up Large Banks". Bloomberg. October 12, 2009. Retrieved February 5, 2010.
  10. ^ Paul Krugman "Financial Reform 101" April 1, 2010
  11. ^ Paul Krugman "Stop 'Stop Too Big To Fail'." New York Times, April 21, 2010
  12. ^ Paul Krugman "Too big to fail FAIL", New York Times, June 18, 2009
  13. ^ Paul Krugman "A bit more on too big to fail and related", New York Times, June 19, 2009
  14. ^ Harding, Robin; Atkins, Ralph (March 31, 2014). "Problem of banks seen as 'too big to fail' still unsolved, IMF warns". Financial Times. Retrieved April 3, 2014.
  15. ^ Wolf, Martin (April 15, 2014). "'Too big to fail' is too big to ignore". Financial Times. Retrieved April 15, 2014.
  16. ^ Moenninghoff, S.C., Ongena, S., Wieandt, A. (January 22, 2015). "The Perennial Challenge to Abolish Too-Big-To-Fail in Banking: Empirical Evidence from the New International Regulation Dealing with Global Systemically Important Banks". SSRN 2440613.{{cite SSRN}}: CS1 maint: multiple names: authors list (link)