Too Big to Fail in U.S. Banking: Quo Vadis?

19 Pages Posted: 11 Jun 2003

Date Written: January 15, 2003


"Too big to fail" is one of the most frequently used but misunderstood terms in banking in the U.S. Except for a brief period in the mid-1980s after the insolvency of the large Continental Illinois National Bank caught the bank regulators unprepared and they did not fail the bank but kept it in operation and protected all depositors and other creditors of both the bank and its parent holding company, insolvent banks of all sizes were failed. But, all depositors were generally protected. Shareholders were wiped-out, as they eventually were even at the Continental. By 1990, TBTF had become an expensive and unpopular program and its potential use, even in its narrower form, was severally limited by the FDIC Improvement Act of 1991. The FDIC was explicitly prohibited from protecting uninsured depositors and other creditors in resolving insolvent banks if doing so would increase the cost of resolution to it. However, an exemption was provided in cases where protecting these claimants would avoid or mitigate potential serious adverse effects on the economy and financial stability. But invoking such a systemic risk exemption was made more difficult. Since 1992, no such exemption has been invoked by the regulators. However, no large money market bank has approached insolvency in this period, so that there has not been a real test. But any uncertainty is with regard to protection of some or all of the uninsured claimants, not with regard to legal failure. This paper traces the history of TBTF, analyzes the reasons for its use, and speculates on its use in future years.

JEL Classification: G21, G28

Suggested Citation

Kaufman, George G., Too Big to Fail in U.S. Banking: Quo Vadis? (January 15, 2003). Available at SSRN: or

George G. Kaufman (Contact Author)

Loyola University Chicago ( email )

820 North Michigan Avenue
School of Business
Chicago, IL 60611
United States
312-915-7075 (Phone)
312-915-8508 (Fax)


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