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Banking Industry Too Big to Fail Analysis After Financial Crisis

Author: ZhangHongHai
Tutor: AiHongDe
School: Dongbei University of Finance
Course: Finance
Keywords: financial regulations TBTF policy financial stability
CLC: F832.3
Type: Master's thesis
Year: 2010
Downloads: 84
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Abstract

"Too big to fail" has been thought one of the most important causes of the latest financial criss by many market participants and economists. Before this crisis, large high-levered, high-connected financial institutions developed dramatically. They benefit from the notion of "too big to fail". Large financial institutions consider it a big advantage for market positioning, because they find debtors and investors believe that large institutions can easily deleverage and afford no big consequences. As a result, financial institutions generally want to grow bigger and choose more risk products. It’s a typical moral hazard problem.There are huge adverse influences existing in "too big to fail". It breaks market discipline besides moral hazard problem, and it makes financial institutions prefer more risk activities as well as brings unfair competition to the market. "too big to fail" motives large financial institutions to grow big to make market power,so it changes the rules of competition and make financial institutions race to the bottom."too big to fail" also does harm to financial consumers’benefits. When chase the scales,large financial institutions tend to provide complicated financial derivatives to make profit. These products are usually designed by financial engineer and most of them are to complex for general financial consumers to fully understand. Actually, almost nobody can make clear the complete expected influences or totally losses and benefits of these derivatives except for their designers. So when bad things happen,most financial consumers have to face big unexpected losses."too big to fail" can do harm to financial stability as well. Because of moral hazard, lackness of market discipline,unfair competition and harmness of consumer benefit that are caused by TBTF, the financial market experiences much more volatility. Especially when bad time happens,large institutions’behaviour model makes the whole financial system more fragile. Losses that can been absorbed by system can spill over to make the risk contagion and make an individual risk to be a systematic risk. Further, "too big to fail" makes financial regulator intervene the market more and more frequently. The regulator has to step into the playground to save the too-big also the too-important institution and meanwhile brings instability to the whole system.Many financial regulators have research this issue for some time and many new TBTF policies have been published to make sure this problem can be addressed properly.These policies bring chances to regulatory outline and make it necessary to review TBTF theories and research new policies so that we can give a rational and practical road map of TBTF policy reform for our own country.This paper mainly resolve three issues:First,should we save those too big institutions? Second, should we save everyone or can we just save someone that matters? Third, How to save these institutions? The answer to the first one can give the reasons of why regulator can be part of the whole picture. Answer to the second can make the standards of TBTF target clear and answer to the last give specific steps to TBTF policy.This paper has five parts.The first one mainly introduce background and meanings of TBTF. The second part talks about TBTF theories and gives out a new theory of the author. On the basis of TBTF theory, the writer gives out TBTF policy objective, some important rules and specific tools to TBTF problem. The third part describes the situation of banking industry TBTF problem in China. The fourth part makes introduces of TBTF policies from American D-F Act and BaselⅢ. Then in the fifth part we give out our own ways to TBTF. The last part makes some conclusions of the paper and the direction to improve it.TBTF is a big important and systematic problem.Although the writer tries to give a complete plan for the problem, he knows the limits for his own. Different voices and serious critics are extremely welcomed, so we can make deeper understanding and make some improvement to our own TBTF policy.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial organizations, banks
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