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Observations on the Problem of 'Too Big to Fail/Save/Resolve'

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  • Jan Kregel

Abstract

Past experience suggests that multifunctional banking is the leading source of financial crisis, while large bank size contributes to contagion and systemic risk. This indicates that resolving large banks will not solve the problems associated with multifunctional banking--a conclusion reached after every financial crisis, and one that should apply to the present crisis as well. Senior Scholar Jan Kregel observes that it is important to recognize that past solutions may not be appropriate for present conditions. The approach to the current financial crisis has been to resolve small- and medium-size banks through the FDIC, while banks considered "too big to fail" are given direct and indirect government support. Many of these large government-supported banks have been allowed to absorb smaller banks through FDIC resolution, creating even larger banks. As these institutions repay their direct government support, the problem of "too big to fail" is simply aggravated. Thus, the current thrust of government regulatory reform--increased capital and liquidity requirements, and further legislation--is unlikely to lessen the systemic risks these institutions pose.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Policy Note Archive with number 09-11.

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Date of creation: Dec 2009
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Handle: RePEc:lev:levypn:09-11

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Web page: http://www.levyinstitute.org

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Cited by:
  1. Mario Tonveronachi, 2010. "Financial innovation and system design," PSL Quarterly Review, Economia civile, vol. 63(253), pages 131-144.
  2. Corneil, Bruce L. & McNamara, Sue, 2010. "Lessons and consequences of the evolving 2007-? Credit Crunch," MPRA Paper 35912, University Library of Munich, Germany.
  3. repec:psl:pslqrr:2010:7 is not listed on IDEAS
  4. Charles J. Whalen, 2010. "Economic Policy for the Real World," Economics Policy Note Archive 10-01, Levy Economics Institute.

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