Question

“Too Big to Fail Banks” – What is your point of view? Do you agree or do you disagree and why?

Answer 1

When a financial institution becomes too big to fail undermines the credibility of the financial system and the national economy in which that system is rooted, it becomes 'too-big-to-fail. Because of its systemic importance, any threat from the failure of a TBTF bank will be foreshadowed by public action, regardless of the consequences of this rescue for the government. The term too-big-to-fail is implicit in both excessive institutional size and threat of failure: indeed, the term as such connotes a double-sided threat.

Large banks' too-big-to - fail status poses a fundamental threat to financial-market discipline. In its most extreme form, this statement implies that enabling the collapse of a bank believed to have that status would potentially rejuvenate the financial market; eliminating too-big-to - fail insurance would eliminate moral hazard fluctuations in financial markets, deter the rent-seeking lobbying of regulators and policymakers, and free taxpayer money for other purposes, such as job creation.

However, policymakers charged with maintaining financial stability have rarely, if ever, been willing to see whether allowing a TBTF bank to fail would actually benefit the financial market 's functioning or lead to a cataclysmic collapse instead.

The too-big-to-fail status of large banks poses a fundamental threat to financial-market discipline. This statement, in its most extreme form, implies that allowing a bank to collapse would potentially rejuvenate the financial market; eliminating too-big-to - fail insurance would eliminate moral hazard fluctuations in financial markets, dissuade rent-seeking lobbying by regulators and policymakers, and free taxpayer money for other purposes, such as job creation.