If an institution is 'too big too fail,' is it too big?


Amid Fed Chairman Ben Bernanke's call for a "credible process" for imposing losses on shareholders and creditors for a U.S. government decision to close down a financial institution, a parallel discussion will have to occur.

Namely, if an institution is 'too big too fail,' does that mean the institution is too big? In other words, should the U.S. government begin a long, incremental process of breaking-up those financial institutions – and other corporations – whose wayward behavior would pose systemic risk?


Arguably, it's an issue that's as economy-altering as the Fed's and U.S. Treasury's record interventions to both stabilize key financial institutions and provide liquidity to credit markets.

What the United States wants to avoid, of course, is a policy that would hurt the economies of scale, dynamism, innovation, and (at least historically) the more-efficient deployment of capital and resources that stem from increased operational size.

At the other end of the spectrum, however, clearly the United States will not look favorably on another large institution whose recklessness and/or miscalculation leads to another credit crisis or contagion. At this juncture, politically, the scales would be tipped in a favor of bigger public policy changes, including a permanent intervention.

There is no quick and simple answer to the above. Moreover, as of late October, there is no consensus on what constitutes 'too big too fail' or the federal stance toward it, but Bernanke's recent comments and the mood in the Democratic Party-led Congress point to a deepening and clarifying in the months ahead of regulations addressing what a large financial institution can do, and when its size will become an issue.

Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.

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