Too big to fail: Measures, remedies, and consequences for efficiency and stability*

Abstract

This paper evaluates whether reform efforts addressing “too big to fail” actually enhance the stability of the financial system, and whether trade-offs exist between stability and efficiency. We also present and discuss various measures of bank size and complexity since such measures are essential for implementing appropriate corrective remedies. As we will show, there are no unambiguous measures of size or complexity that can fully capture a bank's contribution to systemic risk. Their effects on efficiency are also impossible to capture with certainty. While we recognize the need for additional research and empirical evidence, we do identify weaknesses and strengths of proposed and implemented reforms that could have consequences for bank stability and efficiency.