Speech

Ending 'Too Big to Fail' Is Going to Be Hard Work

Abstract: Ending the treatment of certain firms as “too big to fail” requires addressing two mutually reinforcing issues: first, the expectation that creditors of some financial institutions are protected by implicit government support, should those institutions become troubled; and second, the obligation many policymakers feel to support certain institutions to protect creditors from losses. The current system encourages fragility, which induces interventions. The Dodd-Frank Act attempts to deal with “too big to fail” through the establishment of the Federal Deposit Insurance Corp.’s Orderly Liquidation Authority, but there remains considerable regulatory discretion in how a firm is wound down — discretion that could encourage creditors to believe they may continue to receive protection from losses. A more promising alternative is to require firms to establish “living wills” that would facilitate rapid and orderly resolution and would not expose taxpayers to extraordinary financial support.

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Speech

Publication Date: 2013-05-09