Essay Topic: Does the term “too big to fail” adequately explain why many financial institutions continue to encourage risk-taking activities by their executives? Discuss.
The term ‘too big to fail’ is the idea that a business has become so large and generally does business with many companies for suppliers and services. The company will ingrain in the economy and others company will rely on it for portions of income. If it facing financial problem may cause of failure, the government will provide assistance to prevent its failure. Therefore, if the cost of a bailout is less than the cost of the failure to the economy, a government may decide that a bailout is the most cost-effective solution. "Too big to fail" describes the belief that if an enormous company fails, it will have a disastrous ripple effect throughout the economy. (Unknown, 2013) (Amadeo)
There is a general consensus amongst regulators that the too big to fail banks have gotten ‘too big to jail’. The sizes of the banks have become so systemically important that it is a national risk if government has allowed it to fall. US Attorney General Eric Holder admitted that the big size financial institutions have created complexity of their structures. The U.S. Department of Justice (DOJ) has given up on trying charging the bankers and operators of these financial institutions in matters of corruption or criminal malfeasance. The reason given by them is that if they bringing down any of these huge banks or businesses, it could cause crash the economy. For example, according to the senior U.S. Senator, Elizabeth Warren that even though the bank HSBC had admitted to laundering over 800 million dollars for drug cartels, but they paid the largest fine in history of $1.9 billion in relation to money launder instead of the banker being charged and jailed. From the action of DOJ, it seems that the only way to punish or the authorities can enforce is just the giving out fines as speeding tickets. However, even speeding tickets will result in demerit points and loss of license. But, since the mega banks are pointed as too big to fail and if their operating licenses being revoke, the government believe the country or world economy may affect significantly. (Chan, 2013) (Puzzanghera, 2013)
According to U.S. Federal Reserve Chairman, Ben Bernanke, said, ‘too big to fail is the major source of the crisis and we will not have successfully responded to the crisis if we do not address that successfully’. From my point of view, the term ‘too big to fail’ does adequately explain why many financial institutions continue to encourage risk-taking activities by their executives. The formal history of ‘too big to fail’ begins with the failure and subsequent bail out of nation’s seventh-largest bank, Continental Illinois National Bank and Trust Company (CINB) in the year 1984. CINB forced regulators to recognize not only those very large institutions could fail but also that bank regulators needed to find satisfactory ways to cope with such failures. In September 1984, The Comptroller of Currency testified before the US Congress that some banks were simply “too-big-to-fail” and for those banks’ deposits will be covered under full deposits guarantees, thus marking the formal acceptance of a ‘too big to fail’ policy. [ (Chan, 2013) ] [ (Puliyakot, 2011) ] [ (Unknown, The History of Too Big To Fail, 2011) ]
Starting from 2007, the term ‘too big to fail’ had been familiar in the world to describe why the government needed to bailout some companies. This is because of the U.S’s subprime loan crisis and Europe financial crisis. During financial crisis, it been found that many firms especially those who involve in financial industry or financial institutions asking for the help of government and there are some being bailout but unfortunately also forgo by their government. In U.S, the government bailouts out company like Bear Sterns, AIG, Citibank and etc but...
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