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Origins of too-big-to-fail policy in the United States

Published online by Cambridge University Press:  17 March 2020

George C. Nurisso  and
Edward Simpson Prescott
George C. Nurisso*
Affiliation:
University of Washington – Foster School of Business
Edward Simpson Prescott*
Affiliation:
Federal Reserve Bank of Cleveland
*
Corresponding author: E. S. Prescott, Federal Reserve Bank of Cleveland, PO Box 6387, Cleveland, OH44201, USA, email: [email protected]. G. C. Nurisso, University of Washington – Foster School of Business, email: [email protected].
Corresponding author: E. S. Prescott, Federal Reserve Bank of Cleveland, PO Box 6387, Cleveland, OH44201, USA, email: [email protected]. G. C. Nurisso, University of Washington – Foster School of Business, email: [email protected].
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Abstract

This article traces the origin of too-big-to-fail policy in modern US banking to the bailout of the $1.2b Bank of the Commonwealth in 1972. It describes this bailout and those of subsequent banks through that of Continental Illinois in 1984. During this period, market concentration due to interstate banking restrictions is a factor in most of the bailouts and systemic risk concerns were raised to justify the bailouts of surprisingly small banks. Finally, most of the bailouts in this period relied on the Federal Deposit Insurance Corporation's use of the Essentiality Doctrine and Federal Reserve lending. A discussion of this doctrine is used to illustrate how legal constraints on regulators may become less constraining over time.

Keywords

too big to faildeposit insurancebankingtime inconsistency

JEL classification

G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages G28: Government Policy and Regulation N22: U.S. • Canada: 1913–
Type
The past mirror: notes, surveys, debates
Information
Financial History Review , Volume 27 , Issue 1 , April 2020 , pp. 1 - 15
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Copyright
Copyright © European Association for Banking and Financial History e.V. 2020

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Footnotes

We would like to thank Robert Hetzel, Ed Kane, Larry Wall, John Walter and two anonymous referees for helpful comments. The views expressed in this article are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

References

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