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Origins of too-big-to-fail policy in the United States

  • George C. Nurisso (a1) and Edward Simpson Prescott (a2)

Abstract

This article traces the origin of too-big-to-fail policy in modern US banking to the bailout of the $1.2b Bank of the Commonwealth in 1972. It describes this bailout and those of subsequent banks through that of Continental Illinois in 1984. During this period, market concentration due to interstate banking restrictions is a factor in most of the bailouts and systemic risk concerns were raised to justify the bailouts of surprisingly small banks. Finally, most of the bailouts in this period relied on the Federal Deposit Insurance Corporation's use of the Essentiality Doctrine and Federal Reserve lending. A discussion of this doctrine is used to illustrate how legal constraints on regulators may become less constraining over time.

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Copyright

Corresponding author

Corresponding author: E. S. Prescott, Federal Reserve Bank of Cleveland, PO Box 6387, Cleveland, OH44201, USA, email: edward.prescott@clev.frb.org. G. C. Nurisso, University of Washington – Foster School of Business, email: gnurisso@uw.edu.

Footnotes

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We would like to thank Robert Hetzel, Ed Kane, Larry Wall, John Walter and two anonymous referees for helpful comments. The views expressed in this article are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Footnotes

References

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Origins of too-big-to-fail policy in the United States

  • George C. Nurisso (a1) and Edward Simpson Prescott (a2)

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