Too big to fail
Also called: TBTF · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
"Too big to fail" is the belief that some banks are so large and so connected to others that the government will not let them fail. Lenders expect the state to step in, so these banks can borrow more cheaply. This implicit guarantee encourages them to take more risk. This is moral hazard: taking more risk because you are protected from the consequences. Regulators respond by making such banks hold extra capital and by supervising them more closely.
Example
RBI treats SBI, HDFC Bank and ICICI Bank as domestic systemically important banks. From April 2025 they must hold extra CET1 of 0.80%, 0.40% and 0.20% respectively. This extra capital is meant to offset the too-big-to-fail advantage.
Don't confuse with
- Systemic risk: this is the actual danger that one failure spreads across the whole system. Too big to fail is the expectation of a rescue that such a danger creates, and the extra risk-taking that follows.
Related concepts
- High-Quality Liquid Assets
- Liquidity Coverage Ratio
- Net Stable Funding Ratio
- Global Systemically Important Bank
- Domestic Systemically Important Bank
- Moral hazard
- Prompt Corrective Action
- Deposit insurance
- Bail-out
- Bail-in