Too Big to Fail
Too big to fail?
In this essay I will be addressing the “Too Big To Fail” (TBTF) problem in the current banking system. I will be discussing the risks associated with this policy, and the real problems behind it. I will then examine some solutions that have been proposed to solve the “too big to fail” problem. The policy ‘too big to fail’ refers to the idea that a bank has become so large that its failure could cause a disastrous effect to the rest of the economy, and so the government will provide assistance, in the form of perhaps a bailout/oversee a merger, to prevent this from happening. This is to protect the creditors and allow the bank to continue operating. If a bank does fail then this could cause a domino effect throughout the economy, i.e. bigger companies often purchase supplies through a smaller company who rely on the bank for a large portion of its income, the bank’s failure could then cause them to shutdown, meaning unemployment. So what the regulatory bodies need to decide is what is the more economically viable solution in the long run. The Governor of the Bank of England recently stated that 'if a bank is too big to fail - it is too big.' From 1929 – 1933 the US banking system failed and this caused one of the greatest economic recessions in history. During this period banks were allowed to fail as there was no regulatory body (Federal Deposit Insurance Corporation), no protection of depositors, and no real mechanism for an orderly dissolution of the existing management and transfer of what was valuable to a new, stronger bank.
Friedman, Heller (1969 pp. 79-80) states that "We did learn something from the Great Depression... We learned that you ought to have numbers on the quantity of money. If the Federal Reserve System in 1929 to 1933 had been publishing statistics on the quantity of money, I don't believe that the Great Depression could have taken the course that it did." Meaning that a stricter set of regulations was needed for the
In this essay I will be addressing the “Too Big To Fail” (TBTF) problem in the current banking system. I will be discussing the risks associated with this policy, and the real problems behind it. I will then examine some solutions that have been proposed to solve the “too big to fail” problem. The policy ‘too big to fail’ refers to the idea that a bank has become so large that its failure could cause a disastrous effect to the rest of the economy, and so the government will provide assistance, in the form of perhaps a bailout/oversee a merger, to prevent this from happening. This is to protect the creditors and allow the bank to continue operating. If a bank does fail then this could cause a domino effect throughout the economy, i.e. bigger companies often purchase supplies through a smaller company who rely on the bank for a large portion of its income, the bank’s failure could then cause them to shutdown, meaning unemployment. So what the regulatory bodies need to decide is what is the more economically viable solution in the long run. The Governor of the Bank of England recently stated that 'if a bank is too big to fail - it is too big.' From 1929 – 1933 the US banking system failed and this caused one of the greatest economic recessions in history. During this period banks were allowed to fail as there was no regulatory body (Federal Deposit Insurance Corporation), no protection of depositors, and no real mechanism for an orderly dissolution of the existing management and transfer of what was valuable to a new, stronger bank.
Friedman, Heller (1969 pp. 79-80) states that "We did learn something from the Great Depression... We learned that you ought to have numbers on the quantity of money. If the Federal Reserve System in 1929 to 1933 had been publishing statistics on the quantity of money, I don't believe that the Great Depression could have taken the course that it did." Meaning that a stricter set of regulations was needed for the