Too big to fail : the hazards of bank bailouts / Gary H. Stern, Ron J. Feldman.

Format:

Book

Author/Creator:

Stern, Gary H.

Contributor:

Feldman, Ron J.

Language:

English

Subjects (All):

Bank failures--United States.

Bank failures.

Bank failures--Government policy.

United States.

Bank failures--Government policy--United States.

Banks and banking--State supervision.

Banks and banking.

Intervention (Federal government).

Physical Description:

xiii, 230 pages : illustrations ; 24 cm

Place of Publication:

Washington, D.C. : Brookings Institution Press, [2004]

Summary:

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. The threat is psychological as well as financial. 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 often labeled "too big to fail" (or TBTF), and the government steps in to help shore up such financial institutions. This important new book examines the issues surrounding the TBTF phenomenon, 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 Bank of Minneapolis, warn that too little has been done to reduce creditors' expectations of TBTF protection. To a large degree, the problem is a question of moral hazard, wherein anticipation of a safety net reduces a creditor or bank's incentive to act prudently. Many of the existing pledges and policies meant to convince creditors that they will bear market losses when large banks fail are not credible. The unfortunate results are 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.

Contents:

Introduction: our message and methods

What is the problem?

Why protection is costly

How pervasive is TBTF?

Why protect TBTF creditors?

The growth of TBTF protection

Testing our thesis: the cases of not too big to fail

Can the problem be addressed?

Creating the necessary foundation

Reducing policymakers' uncertainty

Limiting creditor losses

Restricting payment system spillovers

Alternatives for managing too big to fail

Summary: talking points on too big to fail.

Notes:

Includes bibliographical references (pages 197-222) and index.

ISBN:

0815781520

OCLC:

53831545