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Too big to fail : origins, consequences, and outlook

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  • Robert L. Hetzel

Abstract

The policy of too big to fail arose in part from pressures created by the lack of satisfactory bankruptcy arrangements for banks. It prevented market forces from closing banks and protected all uninsured depositors of large banks from loss in the event of failure. The consequent risk-taking behavior of banks produced the systemic instability in banking that the policy was designed to prevent. It is debatable how the Deposit Insurance Reform Act of 1991 will affect the timing of bank closures, the risk-taking behavior of banks, and the contraction of the banking industry.

Suggested Citation

  • Robert L. Hetzel, 1991. "Too big to fail : origins, consequences, and outlook," Economic Review, Federal Reserve Bank of Richmond, vol. 77(Nov), pages 3-15.
    • Handle: RePEc:fip:fedrer:y:1991:i:nov:p:3-15:n:v.77no.6
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    References listed on IDEAS

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    1. George G. Kaufman, 1986. "Banking risk in historical perspective," Staff Memoranda 86-3, Federal Reserve Bank of Chicago.
    2. R. Alton Gilbert, 1992. "The effects of legislating prompt corrective action on the Bank Insurance Fund," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 3-22.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    4. Walker F. Todd, 1988. "Lessons of the past and prospects for the future in lender of last resort theory," Proceedings 215, Federal Reserve Bank of Chicago.
    5. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    6. George G. Kaufman, 1986. "Banking risk in historical perspective," Proceedings 109, Federal Reserve Bank of Chicago.
    7. Walker F. Todd, 1988. "Lessons of the past and prospects for the future in lender of last resort theory," Working Papers (Old Series) 8805, Federal Reserve Bank of Cleveland.
    8. Rolnick, Arthur J. & Weber, Warren E., 1984. "The causes of free bank failures : A detailed examination," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 267-291, November.
    9. David L. Mengle & John R. Walter, 1991. "How market value accounting would affect banks," Proceedings 336, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Edward Simpson Prescott, 2013. "Too Big to Manage? Two Book Reviews," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 143-162.
    2. Hanley, Brian P., 2012. "Release of the Kraken: A novel money multiplier equation's debut in 21st century banking," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-25.
    3. Walker F. Todd, 1992. "FDICIA's discount window provisions," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec.
    4. Huberto M. Ennis & H. S. Malek, 2005. "Bank risk of failure and the too-big-to-fail policy," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 91(Spr), pages 21-44.
    5. Hetzel, Robert, 2024. "What the Fed Needs to Do to Control Inflation and Stabilize the Economy," Annals of Computational Economics, George Mason University, Mercatus Center, June.
    6. Kondor, I. & De Dominics, C. & Temesvári, T., 1992. "Short range corrections to the order parameter and to the excitation spectrum of the Ising spin glass," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 185(1), pages 295-304.
    7. Mark M. Spiegel & Nobuyoshi Yamori, 2000. "The evolution of \"too-big-to-fail\" policy in Japan: evidence from market equity values," Pacific Basin Working Paper Series 00-01, Federal Reserve Bank of San Francisco.
    8. Stern, Gary H., 1998. "Government safety nets, banking system stability, and economic development," Journal of Asian Economics, Elsevier, vol. 9(1), pages 21-29.
    9. Brian P. Hanley, 2014. "Release of the Kraken: A Novel Money Multiplier Equation's Debut in 21st Century Banking," Papers 1401.7344, arXiv.org.

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