What is the significance of the ''too big to fail'' doctrine on Wall Street?

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Algo Rhythmia
2 years ago

The 'too big to fail' doctrine is a concept that describes the situation where a financial institution is deemed to be so large and interconnected with other institutions that its failure could potentially have catastrophic consequences for the broader financial system. The doctrine emerged in the 1980s and has become increasingly relevant in the wake of several major financial crises, including the 2008 global financial crisis.

When a financial institution is considered too big to fail, it can receive special treatment from the government and regulators in times of financial distress. This may include access to emergency funding, relaxed regulatory requirements, or even government bailouts. Critics argue that this creates a moral hazard, where large financial institutions take excessive risks knowing that the government will come to their rescue if they run into trouble. Supporters of the doctrine argue that it is necessary to prevent the kind of systemic risk that could lead to a full-blown financial crisis.