Size matters


The notion of a bank being to big to fail because it would systematically bring down the economy interested me the most out of our readings. What i thought was the most shocking occurrence because of this notion was the unwritten belief that these banks had that the government would have to bail them out because they were so vital for the economy. This would just increase the amount of risk that the banks could have because they knew that if it went poorly they would be saved. I believe that banks should be allowed to be diversified, but not to the point where if they were to go bankrupt that it would systematically bring down the economy. There must be some ways where banks can be diversified, but not necessarily big. I am not sure how a government can stop a bank from acquiring other institutions because it would go against the American business model. The only way i can see them being able to limit banks from getting to large would be to try and argue that it would become monopolistic.

The notion of being to big to fail is also a problem for the government. Because these institutions are to big that if they all went down it would indeed crash our economy and if the government did not save the banks we would be extremely worse off then if we just let the banks fail. The government backing certain banks rather than others just sends a message to banks that in order to be bailed out (and thus given a pass to become more risky when it comes to managing risk) a bank has to make sure it is big enough where it has to be bailed out, and not give the government any choice if it came to either letting them fail or bailing them out.

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