Explain the "too big to fail" doctrine


During a financial crisis, some financial institutions may be in danger of failing, The failure of a single institution is a negative event but might not be too damaging to the economy as a whole. However, a very large bank or other financial institution may be linked to other financial institutions to which funds are collected and disbursed. If the larger bank fails initially, there could be a ripple effect in which additional small and large financial institutions fail also. This type of systemic risk makes these large institutions "too big to fail." As such, the government is more likely to regulate them very strictly and the government is also more likely to bail out such institutions in order to prevent a more massive financial crisis.

Economics

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Economics