‘Too big to fail’ describes businesses or sectors so integral to the financial system or economy that their failure would be catastrophic. Governments often consider bailing out these entities to prevent economic disaster.
Key Takeaways
- ‘Too big to fail’ signifies businesses or sectors whose collapse would trigger significant economic damage.
- The U.S. government has historically intervened with rescue measures to mitigate such risks.
- The Emergency Economic Stabilization Act of 2008 encompassed initiatives like the $700 billion Troubled Asset Relief Program (TARP).
Financial Institutions in Crisis
A significant bailout of financial institutions during the 2007-2008 global financial crisis underscored the term ’too big to fail’. Following the collapse of Lehman Brothers, Congress approved the Emergency Economic Stabilization Act (EESA) in October 2008.
Rescue measures included TARP, allowing the U.S. government to purchase distressed assets to stabilize the financial system. The aftermath saw new regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Banking Reforms: Past, Present, and Future
Impact of Early Failures
Following the bank failures of the 1920s and early 1930s, the Federal Deposit Insurance Corporation (FDIC) was created to monitor banks, insure deposits, and secure public trust. It guards individual accounts in member banks up to $250,000 per depositor.
Enactment of the Dodd-Frank Act
Passed in 2010, the Dodd-Frank Act aimed to avert future bailouts of the financial system. The Act imposed new regulations on capital requirements, proprietary trading, and consumer lending. It also established higher levels of oversight for systemically important financial institutions (SIFIs).
Global Banking Reforms
The 2007-2008 financial crisis had global repercussions, sparking reforms. Regulatory bodies, such as the Basel Committee on Banking Supervision and the Financial Stability Board, emphasized ’too big to fail’ banks, including Mizuho, the Bank of China, BNP Paribas, Deutsche Bank, and Credit Suisse.
‘Too Big to Fail’ Companies
Banks named by the Federal Reserve (Fed) as potential threats to the U.S. financial stability include:
- Bank of America Corp.
- The Bank of New York Mellon Corp.
- Citigroup Inc.
- The Goldman Sachs Group Inc.
- JPMorgan Chase & Co.
- Morgan Stanley
- State Street Corp.
- Wells Fargo & Co.
During the 2007-2008 crisis, entities like General Motors and AIG were deemed ’too big to fail’ and received government assistance.
Critiques and Adjustments of
Related Terms: Bailout, Financial Crisis, Dodd-Frank Act, Systemically Important Financial Institutions, Troubled Asset Relief Program.
References
- Cornell Law School, Legal Information Institute. “Too Big to Fail”.
- U.S. Congress. “Public Law 110-343, Emergency Economic Stabilization Act of 2008”, 122 Stat. 3780 (Page 16).
- U.S. House of Representatives, Committee on Oversight and Government Reform, via govinfo.gov. “The Causes and Effects of the Lehman Brothers Bankruptcy”.
- U.S. Code, House.gov. “12 USC Ch. 52: Emergency Economic Stabilization”.
- U.S. Government Accountability Office. “Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues”.
- Federal Deposit Insurance Corp. “About FDIC: What We Do”.
- U.S. Department of the Treasury. “Financial Stability Oversight Council: Designations”.
- U.S. Congress. “H.R.4173 — Dodd-Frank Wall Street Reform and Consumer Protection Act”.
- Financial Stability Board. “2022 List of Global Systematically Important Banks (G-SIBs)”.
- Federal Reserve System. “Large Institution Supervision Coordinating Committee”.
- ProPublica, Bailout Tracker. “Bailout Recipients”.
- U.S. House of Representatives, Committee on the Judiciary. “Dodd-Frank Act’s Effects on Financial Services Competition”, Page 16-17.
- Congress.gov. “S.2155 - Economic Growth, Regulatory Relief, and Consumer Protection Act”.
- NBER. “Too Big to Fail Before the Fed”, Page 2.
- U.S. Department of the Treasury. “Emergency Economic Stabilization Act Programs FY 2013: President’s Budget Submission”.
