THE TOO-BIG TO FAIL :

Evidence and Forbearance.

Miguel Ruiz M

Abstract

This article studies the Too Big To Fail (TBTF) doctrine, it is one doctrine

that explain why big banks or big companies are not allow to fail. We

examines the main features of the TBTF regimes , we give a brief history of

the doctrine when it started to be applied and which were the foundation for

applying it . An analysis of the consequence of the doctrine.

One of the most important sectors in an economy is the financial sector. A buoyant

financial system is correlated with a growing economy. There is empirical evidence that

access to credit improves productivity of certain sectors of the economy. Perhaps of this it

is important to have a stable financial system that can respond quickly to bank runs that

may occur.

The Too big To fail (TBTF) postulates that a government in general can not allow big

banks or big companies to fail for the reason that they are very big and a failure can bring

adverse consequences to financial system.

Regarding this we might face a trade off, in one side we have that some companies want to

grow , want to be big. They want to take advantage of economics of scale or economics of

scope. This make them more efficient than smaller firms. Usually Big companies have

more market power and a lower cost of capital. In the other side we can have that this big

companies are riskies for the economy. They can be to big or too well connected that a

failure of one this companies can be disastrous for the financial system.

This article is organized as follows. In the next section we discuss how the TBTF

beginnings , when it was articulated , its development and the implication and

consequences of it. In section II then presents the rationale and finally the last section , the

third section,

summarizes the policies from the past and into the future that aim to deal with the

doctrine, both in the US and around the world.

The TBTF problem

The TBTF problem was formally articulated in 1984. When the congressman McKinley

exclaim that :” there is a new kind of banks. It is called too big to fail , and it is a wonderful

bank.” . It was in consideration for Continental Bank’s bail out.

The banks that are considered TBTF are banks that can be considered “systemically

important financial institutions”, or SIFI. Even though we say that size is important it is

not sufficient condition to be considered SIFI, there are other aspects that we must

consider to be catalogued as SIFI.

The systemic importance of banks could came from another sources such as : undermining

confidence in other large institutions with similar investment portfolios and, hence, runs

on those institutions.

Rochet and Tirole (1996), Freixas and Parigi (1998) gives evidence that a financial

institution that is linked to many other institutions via lending and borrowing

relationships, may cause those firms to fail if it fail itself.

Morrison and White (2010) argue that regulators are concerns about their reputations. In

case of a bank failure the public can loose confidence in other banks supervised by the

same regulator, therefore could cause a run. Other problem is the economic cost a bank

failure, Ashcraft (2005) have found reduction in Texan GDP after a failure of Texan banks.

These arguments given above were used by American Financial autorities to jutify Fed’s

rescue of some banks. Besides the economics reasons is inevitable to keep some

institutions as TBTF for political reason. As this could be the case in many economies , it is

important to have present the implications of an TBTF policy.

Development of the TBTF

Many believe that the first bank bailouts came from the government side, but was

otherwise. In the last two decades of the nineteenth century had an important role

crearinghouses to save banks. Until the Grand deprecion, the U.S. economy had suffered

financial crises every 15-20 years. It is then that the American government design a kind

of financial safety net and deposit insurance designs, regulates securities.

In the panics of 1880 and 1890 the member banks of the New York Clearinghouse took the

responsibility of saving partner banks. The participation of the Clearinghouse in 1884 was

so timely that allowed the bank run pass the border of New York. This is the first example

we can point the loan clearinghouse Emison certificate by the New York Clearing House so

that I avoid the spread of the crisis. The panic began with the fall of Marine National Bank,

which was a small bank, this bank will fall seguió a brokerage firm, Grant and Ward. This

led to a third institution, the Second National Bank, suffered a run on its deposits. The

concern was higher when the Metropolitan National Bank faced bank runs they did close.

The problem with the latter is that bank had many commercial and financial relations with

other institutions which could carry disease. To avoid this the New York Clearing House

Association issued an certificate of GBP 600,000 for the Metropolitan Bank. The bank

opened the next day avoiding run to other institutions. The next run was in 1890, which

began with the fall of a Brokerage firm in November 1890, this caused problems for two

banks, the Bank of North America and the Mechanics and Traders Bank. Fortunately the

Clearing House Association act in time, issuing certificates and the crisis continued. At the

beginning of the twentieth century there were also bank runs. Exactly a bank run in 1907

in the city of New York began at the following banks problems Mercantile National Bank,

New Amsterdam Bank and the National Bank of north America.

The Clearing House Association acted in time to deliver the money that these banks need

not to close their operations. The same initial luck did not run the Trust Company of

America and the Knickerbocker Trust, both institutions were investment banks, and these

were not part of the New York Clearing Association. In the first instance there was no

decision to save them but due to the panic that finally genre Loan Certificate issued. After

the events following a period of relative calm until the time of the Great Depression. In

reaction to the Great Depression regulatory measures were introduced, creating the FDIC,

separation of commercial banks and investment banking.

The Federal Deposit Insurance Corporation ,FDIC, was created 1933 to protect depositors

holding small accounts. It was no created to keep insolvent banks in operations. From

1950 until 1982 theFDIC act allowed the FDIC to prevent a bank from failing if the bank

were judged “essential to provide adequate banking service in its community”. A bank can

be bailed out if two of three FDIC board members determine it should be. Since 1982, the

FDIC has had can prevent failures by arranging purchase and assumption transactions if it

determines that liquidation of banks is a costlier alternative.

In 1971, Unity Bank in Boston became the first bank bailed out. The Bank was saved

because of a fear that failure of this bank would provoke riots in black neighborhoods.

This bailed out could be identified as the first step in establishing too big to fail as public

policy

The problems about TBTF returned in the early 80's. The problem began in 1984 with the

Continental Illinois Bank and Trust Company that was the 7th largest bank in the U.S..

This case is one of the best examples of TBTF in the U.S.. The Continental was an U.S. bank

that received financial aid from the FDIC. The aid consisted of a contribution of $ 1 billion

to the bank. Two facts are important to note, first, that the help came in conjunction with a

public statement in which the FDIC guaranteed money to all depositors and creditors of

Continental so they do not suffer any loss, the second is that the FDIC took over the

administration of the bank converting it into a government bank.

Financial and banking authorities of that time argued that the fall of the Continental would

mean that other banks have bank runs which would have ended in a systemic crisis. This

led to Congressman Stewart McKinney declared that there was a new kind of bank, to be

called too big to fail. TBTF.

After the Continental had a crisis that led to declines of some banks at the beginning of the

90s. As a result the FDIC had to recapitalize its background. This principle of TBTF

persisted during the crisis at the beginning of the 90's when the U.S. government rescued

some institutions that were not part of the insurance system. The Long-Term Capital

Management, a hedge fund, collapsed in 1998 but was rescued on the ground that could

bring a systemic risk. This was the beginning of TBTF status granted to hedge funds. In the

XXI century the American government also proceeded to rescue some financial institutions

because of their systemic risk. Some of these institutions were investment banks, to which

they extended the principle of TBTF.

US government saves Bear Sterns allowing its sell to JP Morgan Chase by providing $ 30

billion in financing. Washigton Mutual was taken over by the government and then after

sold to JP Morgan.

In october 2009, nine large banks were recapitalized by the government . This was

followed by other bailouts for Citigroup, AIG, Bank of America.

Contrary to what happened to these companies, Lehman Brothers was allowed to fail. Its

failure stunned the market, short term borrowing and lending froze. There are a lot of

controversy around the Government decisión for allowing Lehman to fail.

Some economists state that this was a mistake

Characteristics or attribute of a TBTF scheme

Stern and Feldman (2004) state that a TBTF is a regime where uninsured creditors expect

to the government to save them from failure of big banks. Nevertheless we can detail the

main attributes of a TBTF.

1.- In general banks or financial institution are assessed as TBTF , however, we can find

insurance corporations, automobile manufactures and companies from other sectors to

have been beneficiated as TBTF companies.

2.- The institutions or companies that are catalogued as TBTF usually exploit their

protected status, this also includes parties as creditors , employees and management

board of the financial institution

Categories of state protection measures.

The first state protection measure is the provision by central banks of liquidity to

financial intermediaries, in this way , the state ensures the provision of liquidity and the

consolidation of financial system.

A second protection measures is given to individual banks through buying-up toxic

securities, loans , or recapitalization. The last measure of protection is the guarantees for

bank deposits, interbank loans

THE RATIONALE FOR TBTF

In this section we discuss the main reason for a TBTF policy , all of then are considered

under the systemic risk premise. In general it has been argued that TBTF policy in

banking is necessary because:

1.- The financial system can have “systemic” problems when a large bank fails, leaving

some depositors and other creditors unprotected. Without a TBTF policy it is feared that

depositors that are not insured will withdraw their funds from the banks, thereby

accelerating the problems facing these banks and perhaps spilling over to other weaken

banks then forcing them to fails too.

2.- The banks supervisors and regulators have a difficult time determining which banks

are viable and which need to be liquidated, one that depositors start to run for their

deposits.

3.- if a considerable amount of time is required to arrange for the sale of liquidation of a

large bank , uninsured depositors the opportunity to move their funds to safer institutions.

Thus, unless the supervisor is willing to close large banks at the first sign of trouble, and

thereby incur the large and often unnecessary expenses of liquidation, it is unlikely that

uninsured deposits will remain by the time a determination of nonviability is made.

The prevention of systemic risks that can overwhelm the banking and financial system is

the primary argument made in the support of the TBTF doctrine. Systemic risk, or serious

disruptions in domestic and international payment and settlement systems.

The failure of a large bank could impar the payment system among individuals and banks

to a sufficient degree to have a enormous impact in the economic activities of a country.

Large banks are typically providers of correspondent banking services to smaller banks .

Part of the compensation received by the larger banks is in the form of compensating

balances held by the smaller banks at the correspondent bank. If there is a failure of one

larger bank we could have a effect of liquidity and solvency problems for the smaller

banks.

One of the major of systemic risks is related to the risk of depositors runs on banks if

confidence in the banking system is shaken. The run can affect both healthy and un healthy

banks and lead to significant short-run credit supply problems. The credit relationships

are not readily transferrable from one institution to another , because the initial lending

institution often has unique information about the borrower and have been monitoring

loan progress. A run on the deposits at one bank will lead to increased deposits at stronger

banks, but it will be much more difficult for borrowers to move from one bank to another.

Hence , with this the doctrine TBTF may be justified because a rapid shift of deposits from

weak banks to stringer banks may have serious consequences for the creation and

maintenance of credit relationships.

Another source of systemic risk is related to the role that large banks play in the market

for mortgage-backed securities, government securities and municipal securities. Large

banks provide liquidity to many of these markets because the banks play the role of a

marketmaker. Thus, a collapse of a large bank could damage the operation of these

markets.

IMPLICATIONS OF TBTF

When banks do not expect to bear the cost of bank failure, they asume more risks. It is

more likely that bankers take excessive risk by the invisible hand. In addition, because

uninsured depositors and bond holders do not lose in a bank failure, then they do not take

actions to monitor the bank’s activities .

There is academic evidecnes that support the hypothesis that a TBTF policy lowers the

cost of bank funds (O´Hara and Shaw,1990) . After a TBTF policy the bond spreads cease to

reflect bank business risk.

Another implication is the expansión of large banks. The bond prices react positively to

bank merger when this merger brings a TBTF status. The TBTF is like a premiun,

therefore banks are will to pay more for obtaining it.

This finding suggest that banks expands for reasons other that to obtaining scale

efficiencies, the scale expansion leads to banking concentration

Even though the academic evidence for scope economics is contradictory , the 2007-9

financial crisis provides strong support for the hypothesis that banks increase the scale of

the TBTF effect. The Fed gave support to a large number of non-banking firms. As

example we have de AIG bailout. A possible consequence in the future is likely to have a

greater distortion in security markets firms.

We can say that the history of the Too big to fail is not very recent, this problem is linked

to the history of American financial regulation. The regulations on financial markets and

institutions have always been and are oriented to the stability of the financial system of a

country.

Tbtf The problem is a problem that is closely linked with moral hazard, it is generally

assumed that when there is protection for depositors or there is a guarantee from the

government bailout because of the size you can have a bank, banks often take riskier

actions that they would do if they had the mechanisms outlined above. The banks made

riskier decisions makes the financial system becomes more fragile which could lead to a

future crisis.

The bank bailouts and deposit insurance are responses of governments to prevent bank

runs, analyzing the past we can say whether these measures are adequate or not. As the

task of this paper, the problem of not tbtf focus. The theory tells us that the bank rescaste

should occur only when many institutions are in crisis, but what happens if a single bench

which is in crisis and this bank is so large that could destabilize the financial system and

may even cause a crisis systemic.

What happens is that usually save the big bank, so would avoid a systemic crisis, but the

same bank bailout has not allowed to see the crisis and this may convince economic agents

save banking authorities financial institutions.

ECONOMIC CONSEQUENCES OF TBTF

They systemic risk associated with large banks failure is the justification for TBTF,

nevertheless we should consider the TBTF’s economic consequences.

Generaly described as the moral hazard problem, the flat rate system creates undesirable

incentives for the management of banks as well as the depositors. If the objective of the

bank management is maximaze the wealth of the stock holders management clearly has an

incentive to increase the risk of the bank´s asset portfolio.

The problem is that the increased risk is shared by all claimants to the bank`s assets, but

the potential rewards is only to stockholders. When deposit insurance is not risk sensitive

the banks equity holders benefits if its risky investment pay off. But if the risky

investment default , stockholders lose their capital investment and either depositors or

the FDIC bears the cost of failure. The deposit insurance system provides a “deposit

subsidy” to shareholders.

The other problem is for the structure of the banking industry. It follows that the moral

hazard/deposit subsidy effects are exacerbated as a bank’s net worth diminish. The

structural implication is that larger banks have an incentive to maintain lower capital-to

asset ratios than smaller banks. The asymmetric distribution of the deposit subsidy also

impacts the behavior of depositors. Depositors of larger banks have little incentive to

monitor the riskiness of banks. If the banks fails , the insurance is obligated to protect

small depositors, and large depositors can rely on the FDIC to extend coverage in

accordance with the TBTF doctrine.

A TBTF policy can have a negative effect on the economic efficiency of banking. The

economic conditions in a particular banking market may be so severe as to cause a bank to

be unviable and to fail. This bad luck can result in the failure of both efficient and

inefficient banks. The optima system is one where regulators are able to determine which

are the efficient banks , and which are the inefficient banks that should be closed. The

current TBTF policy does not allow this. Thus , we have a kind of zombie banks , these are

banks that are allowed to continue in operation and also to compete with the efficient

banks, provoking damage to them in the long run. This zombie bank results in costs that

all banks must share. Thus the TBTF policy, creates an incentive for banks to become

larger and risky

Empirical Evidence of measures of protection.

At the XXX section we explained the 3 kind of state measures of protection. Regarding the

provision of liquidity to financial intermediaries , Jordan (2009a) the SNB responded with

liquidity to the banking system over various terms to almost an unlimited extent.

As evidence of recapitalization ,the second state measure ,we have the Capital Purchase

Program (CPP) and the Targeted Investment Program (TIP). According to the IMF the

total solvency assistance in USA was 4.6% of GDP; 5.5 % in Autria , Belgium , Ireland

Regarding the guarantees for banks deposits, the largest guarantees were given in Ireland,

The Netherlands, Sweden and United Kingdom.

SECOND SECTION

In this section we give a brief review of empirical evidence and test. We highlight the test

used and their results.

We will start with an interesting research in given by o´Hara and Shaw (1990) where they

investigate the effect on bank equity of the Controller of the Currency’s announcement

that some bank were TBTF. The authors examine how the TBTF policy could affect banks

operations and review the factors that influence the security market’s reaction to this

policy.

The approach used by them is an event of study that allows them to determine both the

direction of any equity market reaction, and, the size of the reaction for individual

institutions.

As methodology they use they average returns for an eleven-day window centered on Sep

1984 for 63 banks and they use a test statistics that is based on the standard deviation

estimated for the portfolio of sample firms. Once calculated the average residual the

results show residual returns are not significantly different form zero for the 63 banks.

This means that the market did react to the TBTF policy , either with positive or negative

returns depending on factors such as size and solvency. They state in the conclusions two

important things. First, that the TBTF policy brings inequities because it charges all

institutions the same insurance premium but provide greater coverage to some banks.

Second, that the lack of clarity in regulatory policy may cause the market to react

negatively to some intended benefactors of a policy change.

2.)In 1996 Angbazo , Lazarus and Saunders test the hypothesis that the regulatory shift

from full deposit coverage for some large banks to partial coverage for all banks increased

the risk and cost of bank deposits. First, they examine the impact of TBTF restrictions on

the cost of funds of commercial banks. Secondly, there is an examination of the impact of

the depositor preference statute on bank cost of funds. Finally, examine the changes in

market values of commercial banks relative to the changes in TBTF and depositor priority

to determine whether these changes had any wealth effects and how the effects were

distributed by bank size

They took data consist of daily stock returns for a cross-section of national and state

chartered commercial banks, the sample period covers 120 days preceding the first public

announcement to 120 days after the President’s signing of the banking-law reform

package. The tests examine the excess returns on the dates on which new, major

information about the new TBTF policy became public.

They employ the methodology suggested by Schipper and Thompson (1983)1 to analyze

the impact of events leading to the reform of too-big-to-fail doctrine on the market values

of commercial banks. The approach conditions the return—generating process on the

occurrence or non-occurrence of relevant news events, and employs generalized least

squares (GLS) estimation.

The results show that the systematic risk estimate for large banks declined sharply after

the passage of FDICIA, indicating that bank risk declined, partly as a result of the banking

law reform increasing the incentives of depositors to be sensitive to the financial

soundness of their banks. Consistent with the lower systematic risk estimates, the cost of

deposits, and non-deposit funds were significantly lower in the post-FDICIA period.

3.)As we mentioned above in 1984 , the Comptroller of the Currency stated that 11 largest

banks were “too big to fail”. Black , Collins, Robinson and Schweitzer (1997) ask weather

the announcement altered the perception of riskiness of all banking system.

They collect dividend cuts and omissions for all Bank holding Company (BHC) from 1971

through 1991, the BHC returns and dividends are adjusted for stock splits and stocks

dividends.

They did 2 test. First , they examine the changes in institutional equity ownership from

1980 through 1988. Second, they examine stocks returns behavior of bank holding

companies around the announcements of dividend cuts and omissions from 1971 through

1991.

For the first test they find that the announcement is associated with increases in

institutional ownership. Regarding the second test they find that comptroller

1 Schipper and Thompson’s (1983) explicitly incorporates heteroskedasticity in the estimation process. It makes more efficient use of the available data and is particularly suitable for studies involving relatively small sample sizes.

announcement altered the market`s reaction. The TBTF doctrine extends to smaller banks

and as results cause negative reaction to negative information transmitted to the market.

4.) An extended research was given by Gray (1997) . He examine the TBTF in bank failures

from 1985 to 1994. He uses Public Choice Economic theories to develop his model of the

choice made by FDIC, particularly theories involving bureaucracies, interest groups,

individual utility functions, regulations and voting,taking into consideration two landmark

banking laws, FIRREA2 and FDICA3. He test 20 variables and their effect on the size of the

bank.

He find that between 1985 and 1989 the variable is statistically significant and positive,

indicating that TBTF doctrine exist. Nevertheless, the variable SIZE is statistically

insignificant between the enactment of FIRREA (1989) and the enactment of FDICA(1991)

but statistically significant after 1991, this means owners of uninsured deposits in smaller

banks are favored.

THIRD SECTION

This section summarizes the policies from the past and into the future that aim to deal

with the doctrine, both in the US and around the world.

One can star mentioning the Basel approach , this policies measures for TBTF banks are

based mainly in microprudential regulation, that sets minimum requirements for the ratio

of risk weighted assets to common equity Tier 1 capital. One problem of this approach is

that does not capture the risk to others, or to the system as a whole, created by an

individual bank failure.

The design of policies to target specific financial market externalities such as TBTF are

difficult to observe , to quantify and to implement . Hence , due these uncertainties and

measuring problems the objective of regulatory policies developed to address the TBTF

problem have been designed to :

• (i) reduce the probability of failure of global systemically important banks (G-SIBs).

2 The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s.3 Federal Deposit Insurance Corporation Improvement Act of 1991

• (ii) reduce the extent or impact of the failure of such G-SIBs; and

• (iii) level the playing field by reducing the competitive advantages in funding markets that these institutions have.

We will expand on each of these three key objectives and describe the policy responses

developed by the Basel Committee on Banking Supervision and the Financial Stability

Board (FSB). Which are can considered as Global Authorities in financial supervision.

-Reducing the probability of failure of G-SIBs

Reducing the probability of failure of G-SIBs is the main goal of the regulatory response to

the too-big-to-fail problem. Raising the amount of going-concern capital for these

institutions through the application of a capital surcharge will lower their probability of

failure. This in turn will lower the ex ante expected impact of their failure.

Basel has developed a methodology to identify Global systemic Banks , this methodology

take indicators such as size, interconnectedness, global activity and complexity. The

Basel’s objective is to disincentive to a G-SIB becoming more systemically important.

-Reducing the impact of failure

The simplest way to reduce the impact of a firm's failure is to reduce its systemic

importance directly , then financial authorities must place limits on the firm's size or

business functions.

Restrictions on the activities that banks can undertake have been proposed in some

countries. For example, in the United Kingdom proposes ring-fencing traditional retail

banking business activities. The Volcker Rule in the United States proposes restrictions on

proprietary trading by banks and limits on owning and investing in hedge funds. In

Ecuador, since 2012, private banks were obligated to sell their non banking business

activities, such as insurance companies, newspapers, television channels, etc.

The aim of these proposals is to separate essential banking services from other speculative

activities. Thus this help to reduce the impact of the failure of certain banks and their

effects on other sectors of the economy and also this avoid the use of deposits as a fund for

other shareholders investment operations.

At the international level, efforts to reduce the impact of a G-SIB's failure have focused on

improving recovery and resolution regimes and promoting bail-in within resolution. These

measures target the problem that certain firms are difficult to resolve or place into

resolution. This applies in particular to large, complex cross-border firms.

-Levelling the playing field by reducing too-big-to-fail funding advantages

The advantages enjoyed by TBTF banks are significant , some studies have found a funding

subsidy of as much as 60 basis points during normal times and more during crisis periods.

The policies discussed in this article , such as , the capital surcharge, restriction on certain

business activities , all help to mitigate this subsidy. In addition, the Basel III framework

now requires all regulatory capital to fully absorb losses at the point of non-viability

before taxpayers are exposed to loss.

It seeks to address the problem that, during the financial crisis, Tier 2 capital instruments

(mainly subordinated debt), and in some cases Tier 1 instruments, did not absorb losses

incurred by certain large internationally active banks.

Evidence in the Wolrd

In this part we show some evidence of TBTF . At the late of 2007, many governments

around the world started to help their financial sectors in a number of different ways.

Some banks were offered government funding or central bank liquidity insurance

schemes, others received capital injections or were nationalized outright, and some were

offered no support at all. The key concept of this behavior was to maintain future financial

stability.

We have found academic literature about TBTF in UK, Germany, Brazil and others

countries. In the next section we will review literature about TBTF in the rest of world.

Rose and Wiedelak (2012) examine the determinants of a number of public sector

interventions , such as central bank liquidity , insurance schemes, public capital

injections , government funding , for rescuing UK’s institutions. They also examine it this

interventions had an impact on bank behavior

They find that a British bank’s size had a strong effect on the likelihood of intervention:

larger banks were more likely to be assisted. And these interventions mattered in a

tangible sense: they seemed to restore access to wholesale funding. More precisely, the

share of non-retail deposits in total liabilities rose by over 38% following the intervention,

an amount that is economically and statistically significant. As one objective of crisis

intervention was precisely to stabilize flighty financial market funding, it seems to have

been effective.

In the last section we find some examples of government bailout to larger companies, most

of them were given under the TBTF policy. These companies were considered SIFI then

was necesary to bailout them.

In this section we present some empirical evidence and test

Tabak, Fazio and Cajuerio (2010) using a 473 Latin American banks investigate how bank

concentration and size have an influence in cost/ profit efficiency and risk taking behavior.

They contribute to TBTF literature , because their paper shows if the financial sector of a

region composed of developing economies need the same regulation of those in developed

regions.

They measure efficiency and its determinants, such as market concentration, bank size,

and other variables using a Stochastic Frontier Analysis. An analysis of what drives bank

risk-taking behavior is also given.

TEST.

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XXXXXXXXXXXXXXXXXXXXXXXX

The authors do not find evidence about the effect of market concentration on efficiency

and risk taking behavior; nevertheless they take in account on how bank size influences

financial stability at different level of concentration.

They have found that bank increase their sizes in order to gain economy of scale. Latin

American banks performs better as a whole. Concentration seems to reduce cost efficiency

and to increase insolvency risk.

In the LA markets , large banks are risk takers and their profits are no so high as in a more

diffuse banking market. This could be considered as TBTF behavior : banks that perceived

themselves as TBTF may incur in more risks . They recommend the implementation of

BASELIII for reducing the chance of systemic crisis in Latin American financial sector.

Concluding thoughts

Prior to the crisis, numerous academic studies and banking textbooks discussed the too-big-to-fail problem and moral hazard more generally. However, I am sure that, even for those who have written about these issues for many years, the true depth and seriousness of the concerns were only revealed during the recent financial crisis. I remain somewhat surprised to hear the occasional voices which claim that the too-big-to-fail problem is overstated.

It is imperative that we not only cope with the too-big-to-fail problem, but that we also deal with it effectively. The capital surcharge for global systemically important banks introduced by the Basel Committee is a significant step in the right direction. The same is true of the progress on improving recovery and resolution planning.

Finally, the Macroeconomic Assessment Group, which I chair, has issued its final report on the economic impact of requiring additional loss absorbency for global systemically important banks. The results show that the transitional costs of higher capital requirements for global systemically important banks are very small, and that the long-term economic benefits are very large.

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