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Origins of Too-Big-to-Fail Policy

Author

Listed:
  • George Nurisso
  • Edward Simpson Prescott

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 trade offs 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.

Suggested Citation

  • George Nurisso & Edward Simpson Prescott, 2017. "Origins of Too-Big-to-Fail Policy," Working Papers (Old Series) 1710, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:1710
    DOI: 10.26509/frbc-wp-201710
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    File URL: https://www.clevelandfed.org/en/newsroom-and-events/publications/working-papers/2017-working-papers/wp-1710-origins-of-too-big-to-fail-policy.aspx
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    Cited by:

    1. Mario Eboli & Bulent Ozel & Andrea Teglio & Andrea Toto, 2023. "Connectivity, centralisation and ‘robustness-yet-fragility’ of interbank networks," Annals of Finance, Springer, vol. 19(2), pages 169-200, June.

    More about this item

    Keywords

    Too big to fail; deposit insurance; banking; time consistency; TBTF;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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