Systemic risks and the 'too-big-to-fail' problem'

Alan D. Morrison

Oxford Review of Economic Policy, 2011, vol. 27, issue 3, 498-516

Abstract: The financial crisis of 2007--9 resulted in state intervention in financial markets around the world, and the state became a major shareholder in many banks. While state bailouts were politically sensitive, policy-makers had little alternative but to supply funds to financial institutions that were viewed as 'too big to fail', or TBTF. In this paper, I review the history of, and the rationale for, the TBTF policy. I argue that, from a policy perspective, the most important costs of the TBTF problem are incurred ex ante , in the form of distorted incentives that arise as a consequence of distortions to the capital markets, and to the choice of banks' scale and scope. I argue that it is impossible credibly to withdraw the TBTF policy, and, hence, that it should be managed so as to minimize the costs of these distortions. In this context, I discuss the role of policy in institutional design, in the restriction of bank scope, and in designing appropriate capital regulations. Copyright 2011, Oxford University Press.

Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://hdl.handle.net/10.1093/oxrep/grr020 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:oxford:v:27:y:2011:i:3:p:498-516

Access Statistics for this article

Oxford Review of Economic Policy is currently edited by Christopher Adam

More articles in Oxford Review of Economic Policy from Oxford University Press and Oxford Review of Economic Policy Limited
Bibliographic data for series maintained by Oxford University Press ().