Failure written into 'too big' policy

By Henry C K Liu

The potential failure of banks deemed too big to fail (TBTF) presents unsolvable challenges for policymakers. The unacceptability of the systemic impact of such failures on the financial, economic and social order necessitates government intervention in a market crisis.

Thus far, the official response to the TBTF threat has been focused on unlimited government protection of big bank creditors from losses they otherwise would face from big bank failures. Yet creditor expectation of TBTF protection actually encourages big banks to take more risk, thus pushing them closer to the cliff of failure, resulting in significant recurring net costs to the economy and society.