The potential failure of a large bank presents vexing questions
for policymakers. It poses significant risks to other financial
institutions, to the financial system as a whole, and possibly to
the economic and social order. Because of such fears, policymakers
in many countries --developed and less developed, democratic and
autocratic --respond by protecting bank creditors from all or some
of the losses they otherwise would face. Failing banks are labeled
"too big to fail" (or TBTF). This important new book examines the
issues surrounding TBTF, explaining why it is a problem and
discussing ways of dealing with it more effectively.
Gary Stern and Ron Feldman, officers with the Federal Reserve,
warn that not enough has been done to reduce creditors'
expectations of TBTF protection. Many of the existing pledges and
policies meant to convince creditors that they will bear market
losses when large banks fail are not credible, resulting in
significant net costs to the economy. The authors recommend that
policymakers enact a series of reforms to reduce expectations of
bailouts when large banks fail.
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