Prior to the crisis, numerous academic studies and banking textbooks discussed the too-big-to-fail problem and moral hazard more generally. However, even for those who have written about these issues for many years, the true depth and seriousness of the concerns were only revealed during the recent financial crisis. It is surprising to hear the occasional voices which claim that the too-big-to-fail problem is overstated.
It is imperative not only to cope with the too-big-to-fail problem, but also to deal with it effectively. The capital surcharge for global systemically important banks introduced by the Basel Committee is a significant step in the right direction. The same is true of the progress on improving recovery and resolution planning.
Finally, the Macroeconomic Assessment Group has issued its final report on the economic impact of requiring additional loss absorbency for global systemically important banks. The results show that the transitional costs of higher capital requirements for global systemically important banks are very small, and that the long-term economic benefits are very large.
Too big to fail is too big to exist.
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© BIS - Bank for International Settlements
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