Too Big to Fail: The Hazards of Bank Bailouts

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Brookings Institution Press, Feb 29, 2004 - Business & Economics - 230 pages
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The potential failure of a large bank presents vexing questions for policymakers. It poses significant risks to other financial institutions, to the financial system as a whole, and possibly to the economic and social order. Because of such fears, policymakers in many countries—developed and less developed, democratic and autocratic—respond by protecting bank creditors from all or some of the losses they otherwise would face. Failing banks are labeled "too big to fail" (or TBTF). This important new book examines the issues surrounding TBTF, explaining why it is a problem and discussing ways of dealing with it more effectively.

Gary Stern and Ron Feldman, officers with the Federal Reserve, warn that not enough has been done to reduce creditors' expectations of TBTF protection. Many of the existing pledges and policies meant to convince creditors that they will bear market losses when large banks fail are not credible, resulting in significant net costs to the economy. The authors recommend that policymakers enact a series of reforms to reduce expectations of bailouts when large banks fail.

 

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Contents

Warnings
xxv
What Is the Problem?
xxvii
Why Protection Is Costly
12
How Pervasive Is TBTF?
18
Why Protect TBTF Creditors?
32
The Growth of TBTF Protection
1996
The Cases of Not Too Big to Fail
2016
Options
2023
Limiting Creditor Losses
2060
Restricting Payment System Spillovers
2068
Alternatives for Managing Too Big to Fail
2077
Talking Points on Too Big to Fail
2082
FDICIA An Incomplete Fix
2085
Penalizing Policymakers
2095
Supervision and Regulation
2104
Increasing Market Discipline
2115

Can the Problem Be Addressed?
2025
Creating the Necessary Foundation
2034
Reducing Policymakers Uncertainty
2047

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About the author (2004)

Gary H. Stern is president and chief executive officer of the Federal Reserve Bank of Minneapolis. Ron Feldman is senior vice president at the Federal Reserve Bank of Minneapolis. Paul A. Volcker was chairman of the Federal Reserve from 1979 to 1987.

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