Unit 8 Banking Unit 10 Bankruptcy: Banks

Adapted from the CUP website

Too big to fail

What is it? This is a concept supporting the idea that certain businesses are so important to a country and its economy that it would be disastrous if they went bankrupt. The term has been often applied to the largest banks found in countries as they are considered key players in a healthy financial system. When a government has decided that an institution is too big to fail, it also means that it plans to step in and save it if it seems to be moving towards bankruptcy. Opponents to this idea, however, feel that it is counterproductive to keep large businesses alive if they cannot survive on their own. Why is it in the news? This concept has become increasingly important since the beginning of the financial crisis in 2008. As governments began to use taxpayers’ money to bail out large banks, the entire concept of allowing companies to become too big to fail has been an issue of contention in the news. Experts on both sides of the fence have written countless articles and blogs on the problem. During the Basel III meetings in Switzerland about new international banking regulations, the issue of capital requirements for such banks has been raised and there have been discussions in the UK about breaking up the large banks to separate the retail sections from investment banking. Discussion Let's discuss these questions in class What do you think about the concept of “too-big-to-fail? What are the positive and negative aspects of this concept? Why do taxpayers have to pay for large banks which fail?  Shouldn’t they have enough funds to keep this from happening? What is the danger of allowing banks to be created with such far-reaching influence on the financial system? What suggestions would you have for governments facing this problem? Where can I read about it? Basel Capital Rules Alone Won't Fix Too-Big-To-Fail Lenders, Sants says, Bloomberg, October 4th 2010. Swiss medicine could be painful for UK banks, BBC, October 5th 2010. Banks go on the defence as banking commission gears up, Guardian, September 23rd 2010.