Too Big To Fail
Too big to fail describes institutions considered so large and interconnected that authorities are unlikely to allow them to collapse.
Meaning in Practice
The concept implies that the failure of certain banks would cause severe economic disruption. Governments may feel compelled to provide support to prevent systemic collapse. This creates moral hazard concerns.
Why It Matters
Too big to fail distorts market discipline and risk pricing. It encourages excessive risk-taking if institutions expect government support. Regulatory reforms aim to reduce this problem through stronger capital and resolution frameworks.
Market Impact
Perceived implicit guarantees can lower funding costs for large banks. However, regulatory tightening may increase capital requirements and reduce profitability. Market sentiment often shifts during discussions of bail-in or resolution reforms.
Example
During a financial crisis, authorities intervene to prevent the collapse of a major bank due to fears of widespread systemic contagion.