“Too big to fail” (or “TBTF”) is one of the most widely used phrases in the present-day vocabulary of finance. In both high-level policy discussions and popular press, it stands for the core dysfunction of the modern financial system: the recurrent pattern of government bailouts of large, systemically important financial institutions. The financial crisis of 2008 made TBTF a household term, while also leading to the creation of even fewer and bigger financial institutions. To this day, TBTF remains at the center of the policy debate on financial markets and regulatory reform. Yet, the analytical content of this term remains remarkably unclear. In many ways, it still functions as the discursive equivalent of the common “you know it when you see it” philosophy.
In a forthcoming article, I attempt to offer a novel framework for understanding the complex of closely related but conceptually distinct regulatory and policy challenges the TBTF label actually denotes. I start by identifying and defining a fundamental paradox at the heart of the TBTF problem: TBTF is an entity-centric, micro-level metaphor for a cluster of interrelated systemic, macro-level problems. I further argue that this largely unacknowledged inherent tension between the micro and the macro, the entity and the system, renders TBTF a uniquely complex phenomenon and explains the seemingly intractable and persistent nature of the TBTF problem. Continue reading