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Too big to fail : origins, consequences, and outlook

Author

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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, issue Nov, pages 3-15.
  • Handle: RePEc:fip:fedrer:y:1991:i:nov:p:3-15:n:v.77no.6
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    File URL: https://fraser.stlouisfed.org/files/docs/publications/frbrichreview/rev_frbrich199111.pdf
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    References listed on IDEAS

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    1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    2. 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.
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    Cited by:

    1. Prescott, Edward Simpson, 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, Kiel Institute for the World Economy (IfW), 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. 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.
    5. Stern, Gary H., 1998. "Government safety nets, banking system stability, and economic development," Journal of Asian Economics, Elsevier, vol. 9(1), pages 21-29.
    6. 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, issue Spr, pages 21-44.
    7. 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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    Keywords

    Bank failures;

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