Too Big to Fail

The Hazards of Bank Bailouts

Gary H. Stern, Ron J. Feldman

• Publisher: Brookings Institution Press
• Year: 2004
• ISBN:
  9780815796367
• Topic: Business
• Subtopic: Business General
• Index: Business

The potential failure of a large bank presents vexing questions for policymakers. It poses significant risks to other financial institutions, to the financial system as a whole, and possibly to the economic and social order. Because of such fears, policymakers in many countries—developed and less developed, democratic and autocratic—respond by protecting bank creditors from all or some of the losses they otherwise would face. Failing banks are labeled "too big to fail" (or TBTF). This important new book examines the issues surrounding TBTF, explaining why it is a problem and discussing ways of dealing with it more effectively.

Gary Stern and Ron Feldman, officers with the Federal Reserve, warn that not enough has been done to reduce creditors' expectations of TBTF protection. Many of the existing pledges and policies meant to convince creditors that they will bear market losses when large banks fail are not credible, resulting in significant net costs to the economy. The authors recommend that policymakers enact a series of reforms to reduce expectations of bailouts when large banks fail.

Table of contents

• Cover
• Table of Contents
• Foreword
• Preface
• Introduction: Our Message and Methods
• Part One: Warnings
• What Is the Problem?
• Why Protection Is Costly
• How Pervasive Is TBTF?
• Why Protect TBTF Creditors?
• The Growth of TBTF Protection
• Testing Our Thesis: The Cases of Not Too Big to Fail
• Part Two: Options
• Can the Problem Be Addressed?
• Creating the Necessary Foundation
• Reducing Policymakers' Uncertainty
• Limiting Creditor Losses
• Restricting Payment System Spillovers
• Alternatives for Managing Too Big to Fail
• Summary: Talking Points on Too Big to Fail
• Appendix A: FDICIA: An Incomplete Fix
• Appendix B: Penalizing Policymakers
• Appendix C: Supervision and Regulation
• Appendix D: Increasing Market Discipline
• References
• Index