Too big to fail

A too-big-to-fail firm is one whose size, complexity, interconnectedness and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences. Governments provide support to too-big-to-fail firms in a crisis not out of favoritism or particular concern for the management, owners, or creditors of the firm, but because they recognize that the consequences for the broader economy of allowing a disorderly failure greatly outweigh the costs of avoiding the failure in some way. Common means of avoiding failure include facilitating a merger, providing credit, or injecting government capital, all of which protect at least some creditors who otherwise would have suffered losses (Ben S. Bernanke, chairman of the board of governors of the Federal Reserve System).

Which institutions are too big to fail (TBTF) and why? Big in terms of total assets or deposits is one thing. JPMorgan Chase would have had total assets of 3.7 trillion dollars at the end of 2012 rather than the stated 2.4 trillion had it reported under international IFRS standards rather than GAAP; Bank of America would have had assets of 3.1 trillion instead of 2.1 trillion, Citigroup 2.7 trillion instead of 1.9 trillion. They would have dominated the European giants: HSBC with total assets of 2.6 trillion, Deutsche Bank and Crédit Agricole 2.5 trillion, BNP Paribas and Barclays 2.4 trillion. It is, however, probably more relevant to ask, big in relationship to what? A number of alternatives open up: its home banking market or share of different markets, total world banking market, its home country's deposit insurance fund or GDP. In 2012, UBS had “only” 1.2 trillion dollars in total assets, a dwarf in relation to the giants cited above, but it was still 1.9 times Switzerland's GDP, whereas the largest American bank, JPMorgan Chase, at double the size of UBS “only” had assets corresponding to 23 percent of the GDP of the United States. Which is the more relevant figure? And what can be done about it?

In the terminology of the Basel Group's Financial Stability Board (FSB), these behemoths are called Globally Systemically Important Financial Institutions (G-SIFIs).