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Despite a raft of important qualitative reservations and at best poor empirical evidence, the argument that, in case of business problems, large banks are more likely to be bailed out by government intervention than smaller banks (‘too big to fail’) cannot be dismissed entirely. The question, though, is whether or to what extent this has any implications for competition or the stability of the banking system. Under realistic assumptions, especially with respect to incentives for bank management and shareholders, too big to fail hardly leads to excessive risk taking by large banks. The impact of too big to fail on a bank's rating and, accordingly, its refinancing conditions is only marginal, as a breakdown of the various rating components clearly documents. This suggests that the effects on competition of too big to fail come nowhere close to the refinancing advantages enjoyed by public sector banks in Germany. The refinancing advantage of the Landesbanken afforded by state guarantees (Anstaltslast and Gewährtragerhäftung) comes to as much as 50 basis points. Given the continual narrowing of lending margins, an advantage on this scale plays a decisive role in competition. Too big to fail has substantial implications for the architecture of banking supervision. Suitable institutional arrangements need to be created in order to deal with large banks in case of a, potentially systemic, crisis. With banking becoming increasingly global and the number of cross‐border mergers on the rise, this requires solutions at an international, if not at a global, level. Implementing the concept of a European Liko‐Bank, as suggested by the Bundesbank, will require that the supervisory authorities and the European System of Central Banks (ESCB) first create appropriate public sector counterparts.

This paper aims to highlight the shift of impunity from institutions to individuals within the “too big to fail, too big to jail” paradigm and to restore individual liability in the financial industry.

The paper is based on the analysis of HSBC deferred prosecution agreement concluded on December 10, 2012 and of a report by the US House of Representatives Financial Committee released in July 2016.

“Too big to fail, too big to jail” is a paradigm which contains justice. It leads to the impunity of individuals involved due to the absence of trial. Containment of justice is denial of justice. However, the systemic risk is attached to institutions, not to individuals. Therefore, it should not hamper the prosecution of individuals.

Setting sanctions applicable to individuals and proportionate to the crime would contribute to deter financial misconducts.

The value of the paper is the demonstration that there is no basis for a limited personal liability in the financial industry.

Purpose: This chapter explores some of the difficult issues in financial regulation for financial stability. Noting the lack of prior academic work in the topic, this chapter presents a discussion of some difficult issues in financial regulation for financial stability.

Methodology: The chapter draws from real-world experiences in financial regulation and draws support from existing literature.

Findings and conclusions: Some of the difficult issues include: the difficulty in breaking too-big-to-fail financial institutions into small insignificant parts; the difficulty in regulating executive compensation in the financial sector without limiting the ability of financial institutions to offer competitive pay for executive talent; difficulty in instilling strict financial regulation and supervision without limiting the ability of financial institutions to exploit emerging profitable opportunities; difficulty in ensuring that financial institutions increase lending in bad times and during recessions; the rarity of having both a female CEO and Chair in a major financial institution; difficulty in making Central Banks independent from the Federal Government; difficulty in making financial institutions relevant in the midst of hostile technological innovation and disruption.

Practical implications: The implication of the findings is that financial regulation for financial stability is not an easy task. There will be issues that financial regulation can address, and there will be issues that financial regulation cannot address. Acknowledging that such difficulties exist on the path to financial stability is the first step to addressing these issues.

Outlines the US development of the “too‐big‐to‐fail” (TBTF) doctrine following the collapse of the Continental Illinois Bank, reviews relevant research and explores the impact on the efficiency of the banking system. Uses 1983‐1985 call report data, explains the methodology and presents the results, which analyse economies and diseconomies of scope and scale between different types of loans; and levels of inefficiency for TBTF and non‐TBTF banks. Shows that TBTF banks had the greatest increase in inefficiency following Continental’s failure but reduced this in the following year, as did small banks which did not benefit from complete depository coverage. Confirms that the TBTF doctrine increased stability for all banks, but particularly those covered by the doctrine.

The purpose of this paper is to study the information content of about 3,300 global bank rating changes before and after the Lehman bankruptcy in September 2008 to assess if differences in stock market reactions for small and big banks emerge.

The analysis of the stock market reactions of rating changes (upgrades and downgrades) and bank’s size (small and big) is conducted by an event study approach.

The authors find that while upgrades are not associated with significant abnormal bank stock returns, downgrades have a significantly negative effect. This result holds for both small and big banks, while negative abnormal returns are considerably stronger for the former. For small banks, the authors observe an increase in negative cumulative abnormal returns post-Lehman. The lack of a reaction to large banks’ rating downgrades in the narrow [−1,+1] event window indicates that their stock prices may, to some extent, be insulated from negative rating information even post-Lehman, which the authors attribute to an implicit “too big to fail” subsidy anticipated by equity investors.

This paper provides insights to the differences in the information content of changes in small and big banks’ credit rating on stock returns that is unrelated to the well-known size effect. Compared to small banks, big banks seem to some extent be insulated from negative rating changes even post-Lehman – contributing to the on-going too big to fail debate.

The purpose of this paper is to analyze whether and how “living wills” and public disclosure of such resolution plans contribute to market discipline and the effective resolution of too big and too complex to fail banks.

The disorderly collapse of Lehman Brothers is analyzed. Large, systemically important banks are now required to prepare resolution plans (living wills). In the USA, parts of the living wills must be disclosed to the public. The public component is analyzed with respect to contribution to market discipline and effective resolution of banks considered too big and complex to fail. In a statistical analysis of the publicly available section of living wills, this information is contrasted with legislative requirements.

The analysis of public disclosures of resolution plans shows that they are insufficient to facilitate market discipline and, in some instances, fail to enhance public understanding of the financial institution and its business. When coupled with the uncertainty over how an internationally active financial institution will be resolved, the paper concludes that these reforms will do little to reduce market expectations that some financial firms are simply too big or too complex to fail.

A very small data set and the necessity of cross-checking the authors' observations with all publicly available sources. The authors have also tried to infer a purpose for public disclosure of parts of resolution plans. The authorities are remarkably vague on the issue and so the authors have assumed they actually did have a specific intent that would strengthen the system.

The inference from the publicly available portion of living wills is that the authorities are a very long way from abolishing too-big-to-fail.

So far as the authors know, this is the first in-depth analysis of the information available in the public sections of living wills.

This paper aims to analyze the impact of conjectural “too-big-to-fail” (TBTF) guarantees on big and small US financial institutions’ stock prices during the 2008-2009 banking crisis.

The paper analyzes shocks to stock market investors’ expectations of government aid to banks in distress and respective spillover effects using an event study approach. We focus on three major events in late 2008, namely, the Lehman bankruptcy, the Citigroup bailout and the first announcement of the Capital Purchase Program (CPP) by the US Government.

The authors found significant differences in market reactions to the respective events between small and large banks. For both the Lehman and the CPP event, abnormal returns on big banks’ stocks are negative, while small banks’ stocks tend to generate positive abnormal returns. In contrast, large banks strongly outperform small banks in the case of the Citigroup bailout. Results for a control group of non-financial firms indicate that this behavior may be specific to the banking industry. The authors observed significant spillover effects to both competitors and non-competitors of Lehman and Citigroup, and concluded that while the Lehman event shook the widely held belief in an implicit TBTF subsidy to large banks, the TBTF doctrine was reinstated shortly thereafter.

This paper shows that conjectural TBTF guarantees are priced in by equity investors. While government aid to large banks in distress may prevent negative effects on the stability of the financial system, it may also create negative externalities by putting small banks at a competitive disadvantage. The findings suggest that US and European regulators’ recent policy measures directed at establishing reliable bank resolution schemes should be a step in the right direction to level the playing field for small and large financial institutions.

This chapter analyses the causes and effects of the financial crisis that commenced in 2008, and it examines the dramatic government rescues and reforms. The outcomes of this, the most severe collapse to befall the United States and the global economy for three-quarters of a century, are still unfolding. Banks, homeowners and industries stood to benefit from government intervention, particularly the huge infusion of taxpayer funds, but their future is uncertain. Instead of extending vital credit, banks simply kept the capital to cover other firm needs (including bonuses for executives). Industry in the prevailing slack economy was not actively seeking investment opportunities and credit expansion. The property and job markets languished behind securities market recovery. It all has been disheartening and scary – rage against those in charge fuelled gloom and cynicism. Immense private debt was a precursor, but public debt is the legacy we must resolve in the future.