Insight Too big to fail
This CORE Insight looks at what happened during the global financial crisis and how regulatory reforms since then aim to address the problems that arise when banks become too big to be allowed to fail.
Authors
Authored by Claudia M. Buch (Deutsche Bundesbank), Angelica Dominguez-Cardoza (Deutsche Bundesbank, University of Kiel), and Jonathan Ward (Financial Stability Board).
31 May 2021
Concepts
Concepts in this Insight are related to material in:
- Unit 6, Unit 9, and Unit 10 of The Economy 2.0: Microeconomics.
- Unit 6, Unit 8, and Unit 10 of The Economy 2.0: Macroeconomics.
- Unit 6, Unit 10, Unit 11, Unit 12, Unit 17, and Unit 22 of The Economy 1.0.
- Unit 9, Unit 10, and Unit 12 of Economy, Society, and Public Policy.
- Project 10 of Doing Economics.
Recommended reading before starting this Insight:
Highlights
- Banks can be ‘too big to fail’ not only because of their size, but also because they are highly connected to other parts of the financial system. These banks are also referred to as systemically important banks.
- The failure of systemically important banks can put the functioning of the entire financial system at risk, and instability can spill over into the real economy.
- To prevent risks to financial stability due to the failure of systemically important banks, governments have often spent taxpayers’ money to rescue such banks in the past.
- After the global financial crisis, regulatory reforms have been implemented that tackle the ‘too big to fail’ problem by making crises less likely and less costly.
- These reforms have contributed to reducing financial stability risks arising from ‘too big to fail’ banks, but monitoring reform outcomes and risks in other parts of the financial system remains important.
