Too big to fail and too big to save: dilemmas for banking reform

| Publication date: 3 Feb 2016 | External Author(s): Barth, J R, Wihlborg, C | JEL Classification: G18, G21, G28 | Journal: National Institute Economic Review Issue 235 | Publisher: Sage Publications, London

‘Too big to fail’ traditionally refers to a bank that is perceived to generate unacceptable risk to the banking system and indirectly to the economy as a whole if it were to default and be unable to fulfill its obligations. Such a bank generally has substantial liabilities to other banks through the payment system and other financial links, which can be sources of ‘contagion’ if a bank fails. The main objectives in this paper are to identify the different dimensions of too big to fail and evaluate various proposed reforms for dealing with this problem. In addition, we document the various dimensions of size and complexity, which may contribute to or reduce a bank’s systemic risk. Furthermore, we provide an assessment of economic and political factors shaping the future of too big to fail.

Keyword tags: 
financial crises
too big to fail
systemically important banks
Dodd-Frank Act
Financial Stability Board
regulation and supervision