"Too Big To Fail"
From Recessipedia
Too Big to Fail (TBTF) refers to a U.S. government policy first articulated in the wake of the Continental Illinois failure in 1984. Under TBTF doctrine, the government promises to prevent the failure of large, complex banks (and now other financial institutions) if their failure would present a systemic risk to the financial system. In other words, the government treats some financial institutions as utilities necessary for the functioning of the financial system.[1]
TBTF policy increases moral hazard for large banks by rewarding them for undertaking risks. It also subsidies their cost of capital.
Various policies under discussion seek to break up or tax TBTF banks.[2] The Treasury's reform proposals also attempt to address the the TBTF issue. [3] Policy reforms are needed lest bankers and other financiers increase the size and complexity of their institutions solely to avoid the fate of Lehman Brothers, which the government allowed to disintegrate although many observers believed that the Fed would step in to save it.
Notes
- ↑ http://www.realclearmarkets.com/articles/2009/08/05/too_big_to_fail_a_misleading_misnomer_97345.html
- ↑ Viral Acharya and Matthew Richardson, eds., Restoring Financial Stability: How to Repair a Failed System (Hoboken, N.J.: Wiley, 2009): http://www.amazon.com/Restoring-Financial-Stability-Repair-Finance/dp/0470499346
- ↑ http://documents.nytimes.com/obama-s-plan-for-financial-regulatory-reform#p=1
