Origins of Too-Big-To-Fail Policy

44 Pages Posted: 25 May 2017

See all articles by George Nurisso

George Nurisso

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Edward S. Prescott

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: May 24, 2017

Abstract

This paper traces the origin of the too-big-to-fail problem in banking to the bailout of the $1.2 billion Bank of the Commonwealth in 1972. It describes this bailout and those of subsequent banks through that of Continental Illinois in 1984. Motivations behind the bailouts are described with a particular emphasis on those provided by Irvine Sprague in his book Bailout. During this period, market concentration due to interstate banking restrictions is a factor in most of the bailouts, and systemic risk concerns were raised to justify the bailouts of surprisingly small banks. Sprague’s descriptions are also used to describe the tradeoffs and the time-consistency problem faced by bank regulators. Finally, most of the bailouts in this period relied on the Federal Deposit Insurance Corporation’s use of the Essentiality Doctrine. A discussion of this doctrine is provided and used to illustrate how legal constraints on regulators may become less constraining over time.

Keywords: Too big to fail, deposit insurance, banking, time consistency

JEL Classification: G21, G28, N22

Suggested Citation

Nurisso, George and Prescott, Edward (Ned) Simpson, Origins of Too-Big-To-Fail Policy (May 24, 2017). FRB of Cleveland Working Paper No. 17-10. Available at SSRN: https://ssrn.com/abstract=2974002 or http://dx.doi.org/10.2139/ssrn.2974002

George Nurisso (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Edward (Ned) Simpson Prescott

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States

HOME PAGE: http://https://www.clevelandfed.org/people-search?pid=f8ca941e-4b51-41f6-95f8-c87f1d3806e5

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