Too Big to Fail (TBTF)
Term: Too Big to Fail (TBTF) | Book: Lipstick on a Pig (financial bailouts): book profile and conceptual summary
Definition and core idea
An institution is considered “too big to fail” if its disorderly failure, because of size, complexity or systemic links, could cause serious disruption to the whole financial system and the economy.
Explanation and elaboration
This problem takes shape when markets expect the state to be forced to support the institution to prevent contagion. Such an expectation can create a funding advantage and affect the incentive to take risk. The policy response is not simply to shrink institutions; capital and liquidity standards, tougher supervision, recovery and resolution planning, and mechanisms for allocating losses are among the options.
The Financial Stability Board (FSB) describes the post-2008 frameworks aimed at reducing the moral hazard of systemically important institutions and making their orderly resolution possible.
Notes and limits of interpretation
Separating claim from fact
Size alone is not the TBTF criterion; complexity, interconnection, substitutability of services and the state of financial infrastructure also matter.
Relations to other concepts
Review questions
- What problem does this concept clarify?
- Who benefits and who is harmed?
- What evidence is needed to test this claim in a real case?
- Which part is the author’s position and which part needs independent evidence?