Bank Risk of Failure and the Too-Big-to-Fail Polic

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Bank Risk of Failure and the Too-Big-to-Fail Policy: A Reprint from the Journal, “Economic Quarterly”

Some U.S. banks may be perceived as too big to fai

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By Huberto M. Ennis (au); H.S. Malek (au)
Year: 2005
Pages: 23
Binding Paperback

Product Code: 1422313344

Description

Some U.S. banks may be perceived as too big to fail: If any such bank were to get into trouble, the market may expect a government bailout. In general, the possibility of contingent bailouts creates a risk and a size distortion in the decisions of banks. As a result, banks tend to become riskier and larger. The cost of the too-big-to-fail distortions could be high, but the available evidence about their importance in the U.S. economy is inconclusive. In particular, the evidence for the period 1983-1991 has become much weaker in recent years. Any proposal for policy reform should weigh these empirical limitations: with the available data it is very difficult to judge the significance of the too-big-to-fail problem. Charts and tables.

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