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It Is possible to resolve ‘Too Big To Fail' Bank Problems

As many countries work to reduce the problems related to the “too big to fail” banks has not failed, but the financial industry continues to be concentrated in the hands of a few large players. Due to the high degree of potential systemic risk involved the expected concentration has lessened since the financial crisis. In a handful of countries 2-4 banks still control 50-60 per cent of all banking assets.

All countries have implemented new international banking regulations meant to prevent future crises. The distress or failure of one of the top three banks in a country, could destabilize that country’s entire financial system, therefore in the U.S., where too-big-to-fail banks brought the economy to the brink of ruin in 2008, banks are far less concentrated; the three largest control about 45 per cent of all bank assets.

If a bank is too large, other banks wouldn’t be able to replace its activities in case it fails. Too-big-to-fail banks are so integrated into the banking system that other banks would be hit, and confidence in the entire economy would suffer.

Subsidised Banks
The too-big-to-fail banks enjoy an unofficial "subsidy" in the form of lower borrowing costs than those enjoyed by smaller banks. Because creditors assume that a large bank will be bailed out in case of trouble, they are willing to lend to those banks at lower rates than for smaller banks. And that, in turn, strengthens the large banks and makes them even more important to the economy.

In the U.S., the subsidy amounts to $15 to $70 billion per year for the big banks; in Japan it’s in the $15 billion-$70 billion range, and in the euro zone, it works out to $90 billion to $300 billion per year (all figures in U.S. dollars).

Resistant to credit shocks
Canada’s banks were not bailed out directly by taxpayer money like U.S. banks during the financial crisis, as they weren’t facing the same insolvency problems. But they faced a global credit crunch and relied on emergency funding from the Bank of Canada and the U.S. Fed, to the tune of $114 billion at the peak of the crisis, something many argue amounted to a stealth bailout.

Under new international regulations, large banks will be subject to closer scrutiny than smaller banks, and will have to maintain larger cash reserves, making them more resistant to credit shocks.

Some financial institutions still enjoy a "too-big-to-fail" advantage in financial markets, joining a heated debate that could influence regulators that are implementing tough new rules.

The series of research papers, suggests the biggest banks benefited even after the financial crisis from lower funding and operating costs compared with smaller ones.

Source IMF