Too Big to Fail Banks
The cluster discusses the 'too big to fail' concept applied to banks, focusing on moral hazard, government bailouts during crises like 2008, and debates over regulation, splitting banks, or allowing failures to prevent systemic risks.
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Unless the bank is too big to fail
Good question!But I'm not sure bankers want it to work like that - see financial crisis, Greece, "too big to fail".
I thought we didn't like when things were "too big to fail" (like the banks being bailed out because if we didn't the entire fabric of our economy would collapse; which emboldens them to take more risks and do it again).
Banks are too big to fail - until they aren’t.
Yes, you do. If they are by definition too big to fail, then them shutting down could cause runs on banks. When people's confidence in banks crashes, then very bad things happen to our financial system which is predicated on the idea of people keeping their money in banks and bank accounts.Even people pulling their money out of money market mutual funds almost caused a collapse of the monetary system, which is why the Fed had to secure those.
Because "too big to fail" produces moral hazard. Followed by bailouts. Like 2008.
A bank too big to fail, is also too big to exist.
Splitting up the banks won't eliminate the "too big to fail" problem. If a systemic crash (like the one last year) causes hundreds of smaller banks to fail, there will be just as much pressure to bail them out as if one giant bank fails.
If the government deems all banks “too big to fail”, does that remove the risk?
Well, we know what happens when something becomes "too big to fail", don't we?