Better Late Than Never: Addressing Too-Big-To-Fail
Gary H. Stern
Federal Reserve Bank of Minneapolis
Washington, D. C.
March 31, 2009
Destiny did not require society to bear the cost of the current financial crisis. To at least
some extent, the outcome reflects decisions, implicit or explicit, to ignore warnings of the large
and growing too-big-to-fail problem and a failure to prepare for and address potential spillovers.
While I am, as usual, speaking only for myself, there is now I think broad agreement that
policymakers vastly underestimated the scale and scope of too-big-to-fail and that addressing it
should be among our highest priorities.
From a personal point of view, this recent consensus is both gratifying and disturbing.
Gratifying because many initially dismissed our book, published five years ago by Brookings, as
exaggerating the TBTF problem and underestimating the value of FDICIA in strengthening bank
supervision and regulation. In turn, I would point out that we identified:
• virtually all key facets of the growing TBTF problem, including the role that increased
concentration and increased organizational and product complexity, as well as increased
reliance on short-term funding, played in creating the current TBTF mess; and
important reforms which, if taken seriously, could have reduced the risk-taking that
produced the crisis.
But belated recognition of the severity of too-big-to-fail is also disturbing because it
implies that inaction raised the costs of the current financial crisis, as our analyses and
prescriptions went unheeded. Despite our warnings, important institutions, public and private
alike, were unprepared. And I am quite concerned that policymakers may double-down on
previous decisions; some ideas presented in the current environment to address TBTF are
unlikely to be effective and, if pursued, will waste valuable time and resources.