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Abstract "This paper critically examines the emergence of “too big to fail” (TBTF) banking policy: the extension of implicit public insurance guarantees to a small set of large financial institutions. TBTF policy has evolved from a tool used by government authorities to maintain financial-market stability, into a constraint imposed by a megabanking complex on financial and regulatory policy. Regulators and analysts favoring TBTF have attempted to draw a line between the more restricted and more expansive versions of this policy: on one hand, a guarantee that prevents bank runs, and on the other, a pre-commitment to preserve some financial firms as operational entities, no matter the economic damage their risk-taking may have caused. But this line is too easily manipulated in a political system that places few constraints on regulatees’ financial contributions. The beneficiaries of expanded TBTF protection, even in their weakened post-crisis condition, have argued that financial reforms aimed at controlling systemic risk will prevent the resumption of normal loanmaking activity. This shift is problematic because the economic functionality of the US financial system has not been restored. There are alternatives: put size limits on banks, restructure financial relations so that no financial firms are too big to fail, or reconstruct banking using a public-utilities model. A growing number of economists, if not all willing to go along with these proposals, see the need for regulation that prevents financial firms from taking systemic risks. The question is how to put the genie back into the bottle."

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