Breaking Bad? Too-Big-To-Fail Banks Not Guilty as Not Charged

10 Pages Posted: 31 Jan 2014 Last revised: 9 Jan 2015

See all articles by Nizan Geslevich Packin

Nizan Geslevich Packin

City University of NY, Baruch College, Zicklin School of Business; City University of New York (CUNY) - Department of Law

Date Written: January 29, 2014


Large financial institutions receive great competitive advantages because the market still perceives them as likely to be saved in a future financial crisis. Therefore, not only do the largest banks enjoy the benefits of being large and diversified, but they also receive implicit and explicit government subsidies. The most significant subsidy, an implicit one, stems from market perception that the government will not allow the largest banks to fail — i.e., that they are “too-big-to-fail” — enabling them to borrow at lower interest rates. Following up on this controversial issue, on November 14, 2013, the Government Accounting Office issued the first of two reports that focus on the benefits large banks receive because of their size. One less obvious yet highly-related issue, which was not mentioned in the 2013 report, but should be included in the 2014 report that plans to examine the economic advantages the largest banks receive because of implied government support, is the exemption from criminal statutes. Specifically, in this comment, I argue that this exemption contributes to the subsidies economic value while also creating incentives for unethical and even criminal activity.

Focusing on this too-big-to-jail Department of Justice policy, which allows for “deferred prosecution” and advancing settlements instead of criminal charges for large financial institutions that violate criminal laws, this comment examines the negative effects of enabling the largest financial institutions to dodge criminal liability. First, the too-big-to-jail policy effectively vitiates the law as written by Congress. Second, the policy's favorable treatment of the biggest financial institutions conflicts with the basic constitutional principle of equality under the law. More specifically, confirming that it employs such a purposeful policy of flexible law enforcement when dealing with the largest financial institutions effectively means that the government is intentionally discriminating in favor of the largest financial institutions. Third, the policy makes the Department of Justice less interested in prosecuting the individuals who were employed by such large financial institutions and who were responsible for the institutions' legal transgressions, even in the cases where those individuals had direct personal involvement. Finally, the large fines imposed on too-big-to-fail financial institutions in lieu of prosecution for illegal actions increase already-existing negative behavioral incentives — and even create new incentives for bad conduct — among large financial institutions’ executives and decision-makers.

Keywords: TBTF, banks, regulation, criminal, Dodd-Frank Act, too big to jail, government subsidies

Suggested Citation

Packin, Nizan Geslevich, Breaking Bad? Too-Big-To-Fail Banks Not Guilty as Not Charged (January 29, 2014). Washington University Law Review, Vol. 91, No. 4, 2014, U of Penn, Inst for Law & Econ Research Paper No. 14-11, Available at SSRN:

Nizan Geslevich Packin (Contact Author)

City University of NY, Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way
New York, NY 10010
United States

City University of New York (CUNY) - Department of Law ( email )

New York, NY
United States

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