Too Big to Fail: The Transatlantic Debate

Abstract

Although the United States and the European Union were both seriously impacted by the financial crisis of 2007, resulting policy debates and regulatory responses have differed considerably on the two sides of the Atlantic. In this paper the authors examine the debates on the problem posed by "too big to fail" financial institutions. They identify variations in historical experiences, financial system structures, and political institutions that help one understand the differences of approaches between the United States, EU member states, and the EU institutions in addressing this problem. The authors then turn to possible remedies and how they may be differentially implemented in America and Europe. They conclude on which policy developments are likely in the near future.JEL Codes: G01, G21, G38, F36

Protection of domestic bank ownership in France and Germany: The functional equivalency of institutional diversity in takeovers

“…French and German policy-makers also agreed on debt relief for the Greek government in the second bailout package, but only after domestic banks were able to off-load a substantial proportion of their Greek sovereign debt which was purchased by the European Central Bank as part of its Securities Markets Programme (Ibid: 218 and 270). The asymmetric character of adjustment in the Eurozone is important since French and German banks are not only the biggest creditors to countries targeted by private bondholders, they are also large and susceptible to systemic risks (Goldstein and Véron, 2011;Guardian, 2013). Previous international debt crises highlight how the presence of large, and heavily exposed, banks in creditor countries heightens the incentives of their own governments to push for policy agreements that assign the burdens of adjustment on debtor countries (Frieden, 1988).…”

“…This acquisition spree has also resulted in the substantial growth in asset size of French and German banks in relation to the countries in which they are chartered, i.e. they have become too-big-to-fail (Goldstein and Véron, 2011). Thus, our analysis illustrates a shortcoming of banking sector protectionism, an important feature of this special issue on foreign ownership in banking (Epstein, 2014a), namely the contribution of protection from unsolicited takeover bids to the building of banks carrying systemic risks.…”

Transatlantic Cooperation in Financial Regulation Post-2008

“…Then, there is also the question of what makes for an adequate living will for a given SIFI. Various methods and financial models can be used in attempts to resolve these uncertainties, but none provide obvious answers (Goldstein & Véron, 2011).…”

Crisis Management and Resolution: Early Lessons from the Financial Crisis

“…In fact, as large banks acquired failing institutions, concentration has increased on average-for the 12 recent crises countries, the assets of the five largest banks have risen from 307 percent of GDP before the crisis to 335 percent in 2009-complicating resolution efforts. The large-scale public support provided to institutions and markets-a contingent liability equivalent to one-fourth of GDP at the peak of the crisis-has exacerbated perceptions of "too important to fail" (Goldstein and Veron, 2011). Failing firms may be resolved in a number of ways (see Appendix IV), but in the recent crises, few creditors were forced to write down claims because the risk of contagion.…”