Breaking (Banks) Up is Hard to Do: New Perspective on Too Big to Fail

Abstract

Big is bad. At least that has become the view of many individuals about big banks ever since the financial crisis of 2007-2009. The fear is that if a big bank gets into trouble, its problems will infect other financial institutions and threaten the entire economy. Historically, however, big banks in the United States and in many other countries have been implicitly treated as too big to fail.

There is no question that too big to fail is an urgent problem in need of a solution. But there are huge complexities at almost every level. What is “big?” How big is too big? What is a “bank?” What kinds of risk-taking are appropriate for a bank – and why? What do we know about the costs and benefits of different strategies?

This paper addresses these different questions as well as discuss various actual or proposed regulatory reforms to end too big to fail, including breaking up the biggest banks.

Keywords: banks, global systemically important banks, too big to fail, Dodd‐Frank Act, Basel III

JEL Classification: G2, G21, G28