Too big to fail principle

The opinion that a company, and in particular a bank, is immune to insolvency above a certain – how measured? – size is immune from insolvency. – In the case of a bank, the extent to which the institution is so closely interwoven with the rest of the industry that its collapse would endanger the stability of the financial system as a whole comes into particular consideration. But because these banks rely on the state to bail them out in an emergency, they are tempted to take far too high risks. – In fact, it has been shown that governments – as in England with regard to the Northern Rock debacle and in Germany with Hypo Real Estate – or central banks, as in the USA with regard to the mortgage bank Bear Stearns, which was on the verge of collapse in the course of the subprime crisis in March 2008, intervene in order to avoid greater economic damage. – However, this in turn benefits the very large institutions that are active throughout Europe or even the world. Supporting a systemic bank is tantamount to a silent subsidy and leads to a distortion of competition at the expense of smaller or solidly financed institutions. Furthermore, – the systemic bank can hope for higher confidence because customers expect a bail-out in the event of a crisis. The bank – therefore also receives many deposits from investors, which reduces its refinancing costs. In addition, the aforementioned problem of moral hazard arises here; the systemic bank becomes less careful in its business policy in awareness of the state’s – or more precisely, the taxpayers’ – help. – Many considerations have been made to counteract these processes. At the core is the proposal that the authorities quickly and smoothly separate those parts that are vital to the financial system – and here, above all, the obligations of the financial institutions to each other that arise in the trading business or through credit lines – and transfer them to a new entity. The rest of the institution could then go into insolvency. – Furthermore, it was demanded that as an institution grows in size, it must meet increasing requirements for equity and liquidity buffers. Thus, increases in earnings due to growing size or global interconnectedness (economics of scale, economics of complexity) are inevitably counteracted by supervisory disadvantages (diseconomics). – See resolution mechanism, unified, bank supervision, European, bank bail-in, reverse, bank bail-in law, bank triage, bank testament, Bear Stearns bankruptcy, crisis management groups, downsizing, case-by-case decision, size confidence, megamania, minimum requirements for the design of recovery plans, moral hazard, provincial bankers, bailout, risk, systemic, Sifi oligopoly, stability fund, European, Tina, too big to save principle, asset levy, trust, mandatory convertible bond. – Cf. Financial Stability Report 2012, p. 98 (continuing dangers from the collapse of globally interconnected institutions).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk
https://www.jung-stilling-gesellschaft.de/merk/
https://www.gerhardmerk.de/