Systemic risks and the 'too-big-to-fail' problem'
The financial crisis of 2007--9 resulted in state intervention in financial markets around the world, and the state became a major shareholder in many banks. While state bailouts were politically sensitive, policy-makers had little alternative but to supply funds to financial institutions that were viewed as 'too big to fail', or TBTF. In this paper, I review the history of, and the rationale for, the TBTF policy. I argue that, from a policy perspective, the most important costs of the TBTF problem are incurred ex ante , in the form of distorted incentives that arise as a consequence of distortions to the capital markets, and to the choice of banks' scale and scope. I argue that it is impossible credibly to withdraw the TBTF policy, and, hence, that it should be managed so as to minimize the costs of these distortions. In this context, I discuss the role of policy in institutional design, in the restriction of bank scope, and in designing appropriate capital regulations. Copyright 2011, Oxford University Press.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
When requesting a correction, please mention this item's handle: RePEc:oup:oxford:v:27:y:2011:i:3:p:498-516. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.