"Too-Big-to-Fail" - A Misguided and Overused Response to Financial Crises:
C.D. Howe Institute

TORONTO, Oct. 13 /CNW/ - Government authorities relied excessively on what is commonly called a Too-Big-to-Fail (TBTF) policy in bailing out troubled banks and other financial institutions during the recent financial crisis, and are now on the verge of making a more serious error—failing to address its potential for future overuse, according to a study released today by the C.D. Howe Institute. In Too Big to Fail: A Misguided Policy in Times of Financial Turmoil, author Clyde Goodlet, former Advisor, Regulatory Policy, for the Bank of Canada, makes recommendations for reform that would reduce reliance on the TBTF approach and help stabilize the financial system.

The author says authorities are "hooked on" TBTF as the current policy of choice despite the fact that it produces significant moral hazard, generates more costs than benefits and is likely to result in more frequent and more severe financial problems in the future. Ways need to be found, he says, to reduce the likelihood of TBTF being used, whether by lowering the likelihood of large bank failures or finding alternatives to help resolve financially troubled large banks.

In assessing potential policies that would reduce the probability of large bank failures, the author finds shortcomings to  the idea of imposing an international bank tax, but supports the notion of requiring banks to issue so-called contingent capital, or debt that would convert into equity stakes in time of crisis.

For the study go to http://cdhowe.org/pdf/Commentary_311.pdf

For further information:

Clyde Goodlet,
Philippe Bergevin,
Policy Analyst, C.D. Howe Institute
416-865-1904