Origins of Too-Big-to-Fail Policy

George Nurisso and Edward Prescott

No 1710, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper traces the origin of the too-big-to-fail problem in banking to the bailout of the $1.2 billion Bank of the Commonwealth in 1972. It describes this bailout and those of subsequent banks through that of Continental Illinois in 1984. Motivations behind the bailouts are described with a particular emphasis on those provided by Irvine Sprague in his book Bailout. During this period, market concentration due to interstate banking restrictions is a factor in most of the bailouts, and systemic risk concerns were raised to justify the bailouts of surprisingly small banks. Sprague?s descriptions are also used to describe the trade offs and the time-consistency problem faced by bank regulators. Finally, most of the bailouts in this period relied on the Federal Deposit Insurance Corporation?s use of the Essentiality Doctrine. A discussion of this doctrine is provided and used to illustrate how legal constraints on regulators may become less constraining over time.

Keywords: Too big to fail; deposit insurance; banking; time consistency; TBTF (search for similar items in EconPapers)
JEL-codes: G21 G28 N22 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2017-05-24
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dcm and nep-his
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1710

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DOI: 10.26509/frbc-wp-201710

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