Too Big to Fail: A Misguided Policy in Times of Financial Turmoil
32 Pages Posted: 29 Oct 2010
Date Written: October 13, 2010
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
Suggested Citation: Suggested Citation