Is “too-big-to-fail” still an issue?

Paula Hortensia Botezatu and Diana Raluca Diaconescu
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Paula Hortensia Botezatu: West University of Timişoara, Romania
Diana Raluca Diaconescu: West University of Timişoara, Romania

Theoretical and Applied Economics, 2014, vol. XXI, issue Special, 286-294

Abstract: In this paper the authors examine the current situation of the banks that were considered “too-big-to-fail” back in 2008, if the health of these banks is now more critical to the worldwide economy than ever. It is widely recognized that stronger financial crisis that began in 2007 in the U.S., drew the attention of specialists from around the world and financial authorities (central banks, regulators) started to work on a regulatory framework to address systemic risk and have to make the necessary reforms to counter its effects. Due to poor regulation the chaos was created in financial markets and one of the main lessons of the crisis is the risk of a failure of an institution “too-big-to-fail” which can affect both the financial stability and the whole economy of a country and through the contagion effect may impact several countries or economies. Governments have been faced with giants of the financial markets, too big to be allowed to collapse and six years since the crisis begun, the biggest banks are even bigger than in the past, and their fall would put a threatening to the entire financial system. The problem of those banks is even worse than six years ago due to the merger of banks and due to the fact that no government will promise not to bailout companies whose failure would have major negative systemic consequences. Although new regulations are in place, today in order to limit the risks, the six largest banks in the US ended up owning 67% of all the assets of U.S. financial system. Those banks became 37% bigger than six years ago and JP Morgan, which is on the top, has alone $2.4 trillion in assets -- the size of England's economy. If one or several of these banks will collapse the situation would be much worse than 2008 for the worldwide economy.

Keywords: crisis; systemic risk; financial regulation; “too-big-to-fail”; bailout; central bank. (search for similar items in EconPapers)
Date: 2014
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