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The ‘Too Big to Fail’ Problem

We need to understand the varied concerns underlying too big to fail and implement tailored solutions.

Part of a Series

idea light bulbSince the 2008 financial crisis, the problem of financial institutions being “too big to fail,” or TBTF, has been front and center in the public debate over the reform and regulation of the financial industry. Commentators across the political spectrum decried bailouts of the biggest Wall Street financial institutions, arguing that bailouts would establish too big to fail as public policy. When it was time for reform, legislators tried to address this problem, and even incorporated into the full title of the Dodd-Frank Act that one of the bill’s purposes was “to end ‘too big to fail.’”

Yet more than five years after the financial crash, the biggest banks are 37 percent larger than they were before, and the debate over what to do about the size of financial institutions continues. Policy proposals range from improving resolution mechanisms, to more stringent prudential standards such as leverage limits, to charging fees to eliminate the implicit government subsidy the biggest banks receive, to capping the size of the banks, to instituting a new Glass-Steagall Act. Each approach is hotly contested, with commentators frequently arguing that the proposed solution will not actually fix the problem of financial institutions that are too big to fail.

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