Too Big To Fail (TBTF)

1.1 Introduction

”Too Big to Fail”(TBTF), is a well known and widely accepted phenomenon used even by people who are not well-informed in economics and banking. Many people and economists has the opinion that ”Big” in financial institutions is bad. Different in opinions have been shared in the last decade about banks since the inception of financial crisis in 2008. When a big bank encounters some financial distress it generate fear because if it goes bankrupt, its resulting consequences will endanger more financial institutions and hence cause a catastrophe to entire economy. Regulators and some institutions are expected to aid banks to prevent them from indulging in careless and reckless practices. When a bank is facing financial problems,regulators

The Act gave the Fed the power to impose stricter prudential management on banks and also tighten the regulatory key financial institutions. It also limited bank mergers and acquisition to a certain level. In the event that a major bank holding company encounters financial difficulty and early remediation efforts fail, the Federal Reserve is to recommend to the Treasury Department and the Federal Deposit Insurance Corporation

(FDIC) that the company be resolved and shut down under the FDICs new orderly liquidation authority. As an alternative approach, the Independent Commission on Banking(ICB) in the

UK recommends that, a high ring-fence be placed around vital retail banking activities.4

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, in 2011 declared in the annual report that, there is only one safe and effective way to end the TBTF. Fisher in the introduction of the report, writes;

The TBTF institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism. In my

1.4 Delimitations

The main focus of this thesis is to examine how big European largest banks are. Therefore different measures of size are deployed for these big banks and are related to their respective

CDS spread. Other credit risk indicators could have been used but 5 year CDS spreads were preferred because they reflect changes in credit risk very accurate and quicker.

The largest banks in Europe were considered and some banks which failed during the financial crisis. This will give an insight to why some big banks in Europe were rescued and others allowed to failed. Some big banks were neglected in this thesis due to unavailability of data and others were unlisted and also does not restrict the sample regarding bank specialization.

Access to bankscope7was not possible due to its restriction on data retrieval. Monthly frequency data are used and hence all daily and yearly data were converted to monthly data as was used by Vlz and Wedow (2009) and Barth and Schnabel (2012). Currencies are denominated in Euro and US