Financial Reforms: “Too Big to Fail” Essay

Any financial reform faces several challenges that need to be addressed urgently. “Too big to fail” refers to institutions within the financial sector, in particular, banks, that are so large and crucial to the economy of a country or internationally that their failure would be catastrophic to the economy. This challenge is crucial for financial reform as it encourages financial institutions to grow and borrow more money over safe limits, increasing the risk of collapse. Governmental subsidies of “too big to fail” banks can contribute to competitive inequity in the market and the misallocation of resources. In addition, smaller institutions are forced to offer higher interest rates to customers as larger banks attract more customers and can afford to pay lower rates, contributing to inequity in the market. Overall, “too big to fail” is a vital challenge to address. It raises questions about how to limit the bank sizes without jeopardizing their customers. In particular, I wonder what impact such attempts to control the growth of large financial institutions as the Volker rule may have on the customers and the economy as a whole.