The Risk Externalities of Too Big to Fail

Physica A: Statistical Mechanics and its Applications 389 (17), 3503-3507

8 Pages Posted: 1 Nov 2009 Last revised: 26 Jun 2017

Nassim Nicholas Taleb

NYU-Tandon School of Engineering

Charles S. Tapiero

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering

Date Written: November 1, 2009

Abstract

This paper examines the risk externalities stemming from the size of institutions. Assuming (conservatively) that a firm risk exposure is limited to its capital while its external (and random) losses are unbounded we establish a condition for a firm to be too big to fail. In particular, expected risk externalities’ losses conditions for positive first and second derivatives with respect to the firm capital are derived. Examples and analytical results are obtained based on firms’ random effects on their external losses (their risk externalities) and policy implications are drawn that assess both the effects of “too big to fail firms” and their regulation.

Keywords: banking crisis, risk management, too big to fail

JEL Classification: D8, G11, G12, G13, N00

Suggested Citation

Taleb, Nassim Nicholas and Tapiero, Charles S., The Risk Externalities of Too Big to Fail (November 1, 2009). Physica A: Statistical Mechanics and its Applications 389 (17), 3503-3507. Available at SSRN: https://ssrn.com/abstract=1497973 or http://dx.doi.org/10.2139/ssrn.1497973

Nassim Nicholas Taleb (Contact Author)

NYU-Tandon School of Engineering ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
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Charles S. Tapiero

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States

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