Too Big to Fail: A Misguided Policy in Times of Financial Turmoil

Abstract

The bailouts carried out by governments for large banks and other financial entities in the recent financial turbulence are often characterized as a Too-Big-To-Fail (TBTF) policy. Proponents of such a policy argue that preventing the failure of large banks (and possibly other financial and non-financial entities) is necessary to limit the impact that such a failure might have on other institutions or on the real economy. Opponents argue that while such a policy might seem attractive in the short run, even given the enormous financial cost to government associated with its intervention, the long-run costs are even larger and are almost always ignored, making TBTF a poor policy choice.

Keywords: Financial Services, Too-Big-to-Fail (TBTF)

JEL Classification: E52, E58, G28