Too big to fail - Essay Example

Too Big to Fail” By 26th Nov Too Big to Fail In today’s world the business environment faces instability due to many reasons. The technological advancements, the changing credit and other policies, the new rules and regulations by the regulatory authorities all make the business scenario highly unpredictable. To add to this situation we have seen the trends of business giants, conglomerates and tycoons who make up the major chunk of a country’s economic health. These big names come with a tag line of government protection; this umbrella of protection is due to their size, because when a house comes down the surroundings are not that affected as compared to when a building falls down.

However there is another school of thought that correlates size with stability and calls the ‘too big to fail’ a farce. According to this thought stability of big names comes from high investor confidence, well-framed insurance policies and regulations etc. The big names are associated with trust and long-term customer relationship. However, the big banks increase the systematic risks causing smaller banks to collapse. Also with the size increases monopoly in the economy with larger names hoarding over the business scene with little or no advantage to the smaller players.

This unfair treatment creates resentment in the smaller units and thus the level playing field is not achieved.Having used many interventions in the past years, the Fed has now somewhat taken a back seat towards protecting the large banks. As the huge structures demand huge funds which are simply unavailable to save them nowadays. This brings us to the Dodd-Frank Act that was enacted in 2010 as a preventive measure after the 2008 crises. ‘ Its first objective is to limit the risk of contemporary finance – what critics often call the shadow banking system; and the second is to limit the damage caused by the failure of a large financial institution.

’ (Skeel, 2011) This act has made some regulatory changes, identifying non-banking financial system and regulating bank holding companies. An important part of this act is the Volcker Rule that refrains US banks to enter into speculative investments, thus keeping the commercial banks separate from the investment banks.Thus the size brings stability and returns leading to economic growth for a country. But overdoing of goodness turns bitter and in the same manner a bank too big will eventually topple over and when it does the smaller units will be crushed under it.

The too big to fail slogan is right but only to a certain extent as the government will protect its giant in order to earn higher profits and prosperity. However there is limit to which the government or the Central Bank can provide for the too big banks. The hefty books of these big banks at times become unable to manage even for the government thus resulting in bankruptcies and financial crisis situations. Regulations and acts are being formulated in order to prevent these big banks into growing monstrously; the central bank is preventing the banks from overenthusiastic speculation so that the size monster does not harm the entire system.

Therefore, big banks are good but their size needs to be constantly monitored for speculations and other such activities in order to prevent failure and collapse of the entire system.Reference:Skeel, D. (2011). The new financial deal (p.4). Hoboken, N.J.: Wiley.