In this essay I will be addressing the “Too Big To Fail” (TBTF) problem in the current banking system. I will be discussing the risks associated with this policy, and the real problems behind it. I will then examine some solutions that have been proposed to solve the “too big to fail” problem. The policy ‘too big to fail’ refers to the idea that a bank has become so large that its failure could cause a disastrous effect to the rest of the economy, and so the government will provide assistance, in the form of perhaps a bailout/oversee a merger, to prevent this from happening. This is to protect the creditors and allow the bank to continue operating. If a bank does fail then this could cause a domino effect throughout …show more content…
The essence of a bank is confidence, depositors must have confidence in a bank for banking to work, to get them to deposit, to allow banks to lend to family’s and other institutions. However, this crisis did not turn into the new Great Depression but this was due to ‘exceptional policy responses were taken to prevent a banking system collapse’ [ 2 ] (Turner 2009). From this crisis, it was obvious that policies and regulations had to be re-assessed.
On the 4th March 2008 at the Risk Minds Asia Conference the chairman of the Basel Committee stated “...most global banks are only beginning to implement the Basel II framework as of the beginning of this year. The financial turmoil therefore has been playing out under the Basel I capital regime.” (Wellink, 2008). With hindsight, this should have been different, the new Basel II accord should have been implemented more quickly to the bigger, “too big to fail” banks. Banks that are deemed TBTF are given direct support by the government, solutions must be devised to prevent stop this from happening again, the point of moral hazard is raised again here. A bank may take on riskier business as it has the insurance of the government, ‘too big to fail is the cancer of moral hazard’ [ 6 ] (Lui, 2008).
The too big to fail problem could be resolved in a number of ways, in a recent interview with Andrew Ross