Too Big to Fail

Abstract

This thesis is about the Too Big To Fail problem, that is the financial firms that have been defined too large and that are so big that their failure could create problems for the whole economy. These too-big-to-fail institutions operated under an implicit government undertaking that, although it is a private business, in case of failure of their existence is guaranteed by the taxpayer through the Government who bailouts them. After a short introduction to the problem and the history of where they come from (both American and European side), it will be presented the intellectual debate, which connects different views of this problem, in particular why they did it, in relation to a moral hazard problem. Ignoring the colossal potential of creating conflicts of interest, regulators allowed the mega -banks to emerge because of industry’s insistence necessary that they were under new market conditions of global market integration and financial innovation. The supporters of conglomeration submitted that financial conglomerates created better returns for shareholders, due to economies of scale and efficiencies and diversification. Therefore, according to this view, consolidation strengthened the stability of financial institutions and thus the stability of the financial system. The crisis has demonstrated the falsity of these reasons.