CRS – Systemically Important or “Too Big to Fail” Financial Institutions

by Sabrina I. Pacifici on June 27, 2013

Systemically Important or “Too Big to Fail” Financial Institutions – Marc Labonte, Specialist in Macroeconomic Policy. June 19, 2013.

“Although “too big to fail” (TBTF) has been a perennial policy issue, it was highlighted by the near-collapse of several large financial firms in 2008. Financial firms are said to be TBTF when policymakers judge that their failure would cause unacceptable disruptions to the overall financial system, and they can be TBTF because of their size or interconnectedness. In addition to fairness issues, economic theory suggests that expectations that a firm will not be allowed to fail creates moral hazard—if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm’s riskiness because they are shielded from the negative consequences of those risks.”

Previous post:

Next post: