Too Big to Fail

tbtf lede pic

There are close to 7,000 banks in the U.S. The biggest six have $10 trillion in assets, well over twice as much as the next 30 combined. Globally, the six biggest banks have increased their assets more than five-fold since 1997.  That’s a lot of money in not too many hands. It might even mean that those banks are still too big to let fail, as governments decided during the panic of 2008. Anger soared over the disbursement of hundreds of billions of dollars to save banks while homeowners and businesses went under. Global regulators have been working ever since to make it possible for even the biggest financial institutions to close their doors without triggering an economic meltdown. So far, few are convinced that they’ve succeeded. Some new research has concluded that investors still believe in the too-big-to-fail guarantee — and that it’s helping the big banks get even bigger.

The Situation

In November, the Financial Stability Board, a panel of global regulators, said that the biggest 30 or so banks would be forced to hold larger capital buffers against losses than their smaller competitors; the U.S. Federal Reserve said in December that it would require a bit more. Regulators hope to avoid a repeat of the 2008 crisis by making sure banks have enough tucked away for a rainy day. But the extra costs could also give the giants a reason to slim down, the FSB said. Cutting down on a “too big to fail” advantage has been a central goal of regulators since the crash.  A study by the International Monetary Fund found that the belief among lenders that governments won’t let big banks go under produced annual savings of as much as $300 billion for large banks in the E.U., up to $70 billion in the U.S. and $110 billion in both the U.K. and Japan. Those figures, which were roughly consistent with studies by the Federal Reserve Bank of New York and Europe’s Green Party, suggest that the implicit subsidy that results could be at least as big as the big banks’ profits.

Source: International Monetary Fund
Source: International Monetary Fund

The Background

The bank failures of the Great Depression led to the creation of deposit insurance and regulators like the U.S. Federal Deposit Insurance Corporation with powers to take over failing banks and liquidate them in an orderly way. That worked for decades. Then in 2007 and 2008, a series of deeply indebted investment banks not protected by the FDIC faced the equivalent of bank runs as creditors or shareholders started to doubt their solvency. When one, Lehman Brothers, was allowed to go under, regulators learned that the biggest firms were so interconnected that only massive bailouts kept dozens more around the world from failing. Responding to the crisis, regulators hastily extended the safety net till it eventually covered more than half  of the financial sector. The 2010 Dodd-Frank Act expanded the powers of the FDIC to dismantle troubled financial companies that weren’t banks, like insurers and potentially some mutual funds, which would be asked to draw up “living wills,” plans for their own demise. One of the first non-banks to get that designation was American International Group, Inc., the giant insurer whose failure drew one of the largest bailouts in 2008. It’s an honor most candidates would rather do without, and in January 2014 MetLife became the first insurer to sue to remove the label.

Source: International Monetary Fund
Source: International Monetary Fund

The Argument

Big banks argue that too-big-to-fail is solved, or at least on its way out, and that more recent data shows that any borrowing advantage they gained after the bailouts has shrunk dramatically since tougher regulations were put in place; a Government Accountability Office report in July backed this up. Big banks also argue that size alone isn’t the enemy, and that their global firms offer economies of scale that make it easier to conduct transactions and provide credit worldwide. But skeptics abound. Some say the very fact of a safety net encourages recklessness, and that governments have made the problem worse by aiding consolidation. Even supporters of the focus on the “to fail” instead of the “too big” concede the new system has yet to be proven, particularly when it comes to cross-border issues. Federal Chair Janet Yellen admits she is worried: “I’m not positive that we can declare, with confidence, that too-big-to-fail has ended until it’s tested in some way,” she told Congress.

The Reference Shelf

  • The Financial Stability Board’s annual list of Global Systemically Important Banks
  • The IMF study and the financial industry’s response.
  • A study from the Federal Reserve Bank of New York that concluded that big banks can borrow more cheaply, and one from the Clearing House, a banking industry trade association, that argues that the subsidy has faded with new regulations.
  • A study commissioned by the Green Party in the European Parliament that put the value of the subsidy to EU banks at 234 billion euros ($321 billion) in 2012.
  • A review by the FDIC of studies on the subject.
  • An analysis by Bloomberg Government in June 2013 of the too-big-to-fail subsidy and proposed capital surcharges.
  • A list by Bloomberg Rankings of the world’s biggest banks by assets.
  • William Safire On Language column from 2008 on the origin of the term “too big to fail.”

First Published April 14, 2014

To contact the writer of this QuickTake:

Cheyenne Hopkins in Washington at

To contact the editors responsible for this QuickTake:

Maura Reynolds at

John O'Neil at