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Too big to fail - Essay Example

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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…
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Too big to fail
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Download file to see previous pages 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 ...Download file to see next pagesRead More
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