Too Big to Fail

The Hazards of Bank Bailouts

Brookings Institution Press, 2004

15 min read

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A thorough exploration and profound reflection on the risks of the “too big to fail” doctrine

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In this clearly prophetic book, Gary H. Stern and Ron J. Feldman examine the “too big to fail” doctrine, and show how policymakers made the financial system riskier by implicitly promising to bail out the biggest banking institutions. In the wake of the global financial crisis in which several major institutions failed in 2008, getAbstract welcomes this reissued, lucid assessment of one of the most perplexing, perverse policies in financial regulation, the idea that some institutions are too big to fail. Former Federal Reserve Chairman Paul A. Volcker’s foreword helps sharpen the book’s focus, and the authors’ advocacy for an end to bailouts is quite persuasive. This book is recommended reading for anyone seriously interested in understanding the calculus of financial policymakers, financial system risk, and the tilted playing field that benefits huge, risky banks and their shareholders.

Summary

Foreword by Paul A. Volcker

Whether bank failures caused the Great Depression, or vice versa, is still unclear. However, the fact that both occurred together has persuaded policymakers that bank failures have potentially disastrous consequences for the economy. For years leading up to the Great Depression, banks were somewhat regulated and central banks were the acknowledged “lenders of last resort.” However, central banks lent only to fundamentally sound institutions with collateral. The Great Depression led to the establishment of the Federal Deposit Insurance Corporation (FDIC), and to an understanding that government regulators would act to prevent or mitigate bank failures.

In the 1970s, financial deregulation, competition and new economic conditions set the stage for expanded government safeguards against bank failure. The results included the rescue of Continental Illinois Bank, the protection of savings and loan deposits, and tacit acknowledgment by policymakers that some institutions were so crucial that their failure would endanger the entire financial system. Smaller institutions, which regulators exclude from their implicit promise of financial bailout, ...

About the Authors

Gary H. Stern is president and CEO of the Federal Reserve Bank of Minneapolis, where Ron J. Feldman is senior vice president.

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S. D. 7 years ago

its good to start get abstract with a fine book
M. F. 10 years ago

A great prophet.
R. S. 1 decade ago

Published 4 years before the meltdown. I can only say, WOW.

Gary H. Stern and Ron J. Feldman