The Too-Important-To-Fail Conundrum: Impossible to Ignore and Difficult to Resolve

Abstract

The paper provides the IMF staff views on policy options to mitigate the risks posed by institutions perceived as too-important-to-fail (“TITF"). These institutions have become bigger and more complex since the crisis, and risky practices have started to reappear. The paper emphasizes the need to address the problem urgently with a policy framework containing: (i) more stringent capital and liquidity requirements with appropriate safeguards and more intensive supervision; (ii) enhanced transparency and disclosure requirements; and (iii) effective resolution regimes at national and global levels to make resolution a credible option. The paper notes that development of the policies is progressing, but implementation could take several years. It recommends that during the transition period to a more robust framework, coordinated actions should be taken to require TITF institutions to hold more loss-absorbing capital, combined with enhanced supervision to impede their tendency toward accumulating more systemic risk.

Keywords: financial crises, financial stability, too big to fail, too important to fail, moral hazard, resolution, financial regulation, bank capital, contingent capital, bail-in, supervision

JEL Classification: F33, G18, G20, G21, G28, G32, G33, G38, H12