Too Big to Fail

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The term "too big to fail" refers to the idea that some businesses are so large, that if they would dissolve, they would cause havoc in the economy.

Within a year after the near-collapse of the U.S. financial system, the federal response redefined how Americans got mortgages, student loans and other kinds of credit and has made a national spectacle of executive pay. But no consequence of the crisis seemed to alarm regulators more than having banks that were already too big to fail grow even larger and more interconnected.[1]

In late 2009, a U.S. House of Representatives committee approved key regulatory legislation intended to curb the harmful economic effects of financial services institutions deemed too big to fail. The bill aimed to prevent the United States from being once again faced with the prospect of systemic economic chaos if large failing firms are not bailed out.[2]

In an effort to identify systemic risk and prevent future crisis, the Financial Stability Oversight Council was formed. At the start of 2011, they were supposed to start identifying companies that are deemed 'too big to fail' and pose dangers to the market. Tim Geithner was quoted saying at the time, "what size and mix of business do you classify as systemic? It depends too much on the state of the world at the time. You won't be able to make a judgment about what's systemic and what's not until you know the nature of the shock." [3] People close to the matter believe that Geithner was talking about the need for regulators to use discretion over banks with systemic risk and that it was not smart to prescribe hard objective metrics. He believes that this will give the big banks under investigation wiggle room. [4]

References

  1. Banks 'Too Big to Fail' Have Grown Even Bigger. Washington Post.
  2. US lawmakers vote to curb firms 'too big to fail'. Google.
  3. Doubts over plan for systemic risk. FT.
  4. Geithner Queried Risk Concept. FT.