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Too Big to Fail and Too Big to Save: Dilemmas for Banking Reform

Published online by Cambridge University Press:  01 January 2020

James R. Barth*
Affiliation:
Lowder Eminent Scholar in Finance at Auburn University, and Senior Fellow at Milken Institute
Clas Wihlborg*
Affiliation:
Fletcher Jones Chair of International Business at Chapman University

Abstract

‘Too big to fail’ traditionally refers to a bank that is perceived to generate unacceptable risk to the banking system and indirectly to the economy as a whole if it were to default and be unable to fulfill its obligations. Such a bank generally has substantial liabilities to other banks through the payment system and other financial links, which can be sources of ‘contagion’ if a bank fails. The main objectives in this paper are to identify the different dimensions of too big to fail and evaluate various proposed reforms for dealing with this problem. In addition, we document the various dimensions of size and complexity, which may contribute to or reduce a bank's systemic risk. Furthermore, we provide an assessment of economic and political factors shaping the future of too big to fail.

Type
Research Articles
Copyright
Copyright © 2016 National Institute of Economic and Social Research

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Footnotes

This is a short version of a much longer paper with tables and figures, which is available on request. The authors are grateful for helpful comments from two anonymous referees and the excellent assistance of Yanfei Sun.

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