Just How Big is the Too Big to Fail Problem?

Abstract:     
The idea of banks too big to fail (TBTF) is not new. Indeed, it has been three decades since the first TBTF bailout due to concerns about serious and widespread financial repercussions. Since then, of course, big banks have grown much bigger and have become increasingly complex, both in the United States and elsewhere. In this paper, we put the issue of too big to fail in U.S. historical and quantitative perspective, and assess the potential impacts of recent regulatory changes. The developments relating to the TBTF problem based on a global perspective are also examined. The measures taken since the financial crisis of 2007-2009 — including the Basel III regulatory reforms, domestic regulations like the Dodd-Frank Act, and the designation of global systemically important banks — have distinct purposes but also complement one another, to the extent that they are successful. Our analysis points out that despite the recent regulatory changes the future of TBTF remains unclear, but it is likely that it will be different from the past.

Keywords: banks, financial firms, financial crisis, too big to fail, Dodd-Frank Act, Basel III

JEL Classification: G2, G21, G28

working papers series