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Too Big To Fail In Financial Crisis: Motives, Countermeasures, And Prospects

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Executive Summary

Regulatory forbearance and government financial support for the largest U.S. financial companies during the crisis of 2007-09 highlighted a "Too big to fail" problem that has existed for decades. As in the past, effects on competition and moral hazard were seen as outweighed by the threat of failures that would undermine the financial system and the economy. As in the past, current legislative reforms promise to prevent a reoccurrence. This paper proceeds on the view that a better understanding of why too-big-to-fail policies have persisted will provide a stronger basis for developing effective reforms. After a review of experience in the United States over the last 40 years, it considers a number of possible motives.

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