preface

Too big to fail is no theoretical problem, but rather a central public policy dilemma.

Determining the appropriate policy response to an important failing bank has long been a vexing public policy issue. To the extent that creditors of TBTF banks expect government protection, they reduce their vigilance in monitoring and responding to these banks' activities. (Moral hazards)
When creditors exert less of this type of market discipline, the banks may take excessive risks.

Many of the existing pledges and policies meant to convince creditors that they will bear market losses when large banks fail are not credible and therefore are ineffective. The primary reason why policymakers bail out creditors of large banks is to reduce the chance that the failure of a large bank in which creditors take large losses will lead other banks to fail to capital markets to crease working effectively.

Besides, policymakers may provide protection because doing so benefits them personally. Incompetent central planning may also drive some bailouts. But these reasons are less important than the motivation to dampen the effect of a large bank failure on financial stability.

Empirical and anecdotal data, analysis, and general impression suggest that TBTF protection imposes net costs.
TBTF problem has grown in severity. Reasons for this increase include growth in the size of the largest banks, greater concentration of banking system assets in large banks, the greater complexity of bank operations, and several trends in policy, including a spate of recent bailouts.

There is controversy over the the net cost of TBTF protection. Some analysts also argue that big banks fail anyway even without the TBTF protection. Still some other analysts argue that in practice the American legislation makes it impossible to have TBTF problem. Some other people think that there is no realistic solution to the problem.

Authors argue that policymakers can enact a series of reforms that reduce expectations of bailouts for many creditors at many institutions.  

Countries should create or reinforce the rule of law, property rights and the integrity of public institutions. Incorporating the costs of too big to fail into the policymaking process. Appointment of leaders who are loath to, or at least quite cautious about, providing too big to fail bailouts. Better accounting for too big to fail costs and concern about the disposition of policymakers should restrain the personal motivation that might encourage too big to fail protection.