Published June 1, 2006 | June 2006 issue
The most persuasive way to convince bank creditors that their bank isn't too big to fail (TBTF) is for policymakers to reduce systemic risk and to communicate those steps to the public.
This essay describes three such advances: a Federal Deposit Insurance Corp. proposal to improve its ability to limit large bank bailouts, the "NewBank" reform to back up banks that played a heretofore irreplaceable role in key markets, and a private sector initiative to equip financial firms to manage risks posed by modern financial transactions. All three efforts can better manage systemic risk, reduce TBTF bailout expectations and improve social welfare.
Managing Too Big To Fail by Reducing Systemic Risk: Some Recent Developments [complete article]