‘Too Big To Fail’ Still Active Principle

Baseline Scenario writes that despite the proclamation by prominent voices that ‘too big to fail’ has been ended, ‘too big to fail’ lives. Simon Johnson writes, “The market perception that some financial institutions are “too big to fail” is alive and well. If you want to remove that perception, you need to break up our biggest banks.”

Further, he writes, “You can theorize that “too big to fail” should have been removed by the recent reforms or will be eliminated by the passage of time. But as a practical matter – looking at what investors really believe – “too big to fail” is still with us. This implicit government guarantee lowers the funding costs for very large financial institutions because investors are convinced that debt issued by these firms is less risky than, for example, debt issued by small and medium-sized banks”

Read the Baseline Scenario post.

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