Crs Report for Congress: Systemically Important or Too Big to Fail Financial Institutions

Although "too big to fail" (TBTF) has been a perennial policy issue, it was highlighted by the
near-collapse of several large financial firms in 2008. Financial firms are said to be TBTF when
policymakers judge that their failure would cause unacceptable disruptions to the overall financial
system, and they can be TBTF because of their size or interconnectedness. In addition to fairness
issues, economic theory suggests that expectations that a firm will not be allowed to fail creates
moral hazard-if the creditors and counterparties of a TBTF firm believe that the government
will protect them from losses, they have less incentive to monitor the firm's riskiness because
they are shielded from the negative consequences of those risks.