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 Too Big to Fail?! Lessons from the Financial Crisis


Sebastian C. MOENNINGHOFF Assistant exécutif d’Axel Wieandt (du 1er septembre 2009 au 25 mars 2010) ; assistant de recherche, Chaire de finance, WHU N Otto Beisheim School of Management.
Axel WIEANDT Managing Director, Deutsche Bank AG ; ancien CEO, Hypo Real Estate Holding AG (du 13 octobre 2008 au 25 mars 2010) ; professeur honoraire, Chaire de finance, WHU N Otto Beisheim School of Management.

This article examines the emergence and evolution of the “Too-Big-To-Fail” (TBTF) doctrine based on various case studies, identifying moral hazard as the cause for externalities. It examines the role of TBTF within the recent financial crisis with regard to its contribution to and appearance in the crisis. In drawing lessons from the current crisis, a broader concept of systemic relevance is developed building on bank characteristics beyond sheer size. Referred to as “Systemically Important Financial Institutions” by the Financial Stability Board, it is argued that these banks should be regulated rather than downsized or broken up considering the advantages of having large diversified global banks. The article evaluates FSB’s proposed regulatory measures, including capital surcharges, resolution regimes, enhanced supervision and improved core financial infrastructure, and identifies resolution regimes as the most efficient mechanisms to counter TBTF. If designed appropriately, such resolution regimes could convert TBTF into TBDF, or “Too Big for Disorderly Failure”. Finally, the article warns that in reaching a new equilibrium in the financial system, unintended consequences such as concentration, competitive distortion and regulatory arbitrage have to be taken into account.