Too big to fail
As systemically important or too big to fail (English: "Too big to fail " ) refers to institutions such as states and their members, including banks, corporations, mass media and other organizations that are as stabilizing the system that their failure to resolve the prevailing hegemony and would therefore be saved at the expense of the community. Systemic facilities they are rescued in time by the rulers organizations through state intervention ( bailout ) to avert a wider threat to the system. This is especially true for the banking sector, but also for large industrial companies.
In December 2012, the German finance minister was first announced, how many banks are regarded in Germany as systemically important: there are 36 in Switzerland are the two big banks UBS and Credit Suisse and Zurich Cantonal domestically systemically important (as of 2013).
Concept and history
"Too big to fail"
The term comes from the U.S.. After silver the government bailout ( " bail- out") of New York City was in August 1914, the beginning of the " too big to fail " phenomenon in the American financial world. It began with the invention of the closure of the New York Stock Exchange, which could be re-opened on 12 December 1914. The city was in debt to a great extent in British Pounds and later no longer able to obtain the foreign currency for the loan operation due to lack of U.S. dollars. Shortly before its insolvency jumped the U.S. Treasury Department and was responsible for the repayment. In the following period, as reported by Silver, New York has never taken more European capital markets in, but only banks in the city. The city experienced in December 1975, a second bail-out, as at the last minute, President Gerald Ford from its initially negative attitude ( " drop dead " ) moved away.
With the Federal Deposit Insurance Act of 17 August 1950, the FDIC was given the right to bail out financial corporate loans and own funds to make available ( " providing assistance" ), if this is necessary to maintain the stability of the financial system. However, this option was used until 1969 for the first time and then very rarely used. A statistical overview The following table gives the FDIC. In May 1984, the seventh largest bank in the U.S., the Continental Illinois National Bank and Trust Company, was saved as " too big to fail ". The crisis in a previously guessed in May 1982, regional Penn Square Bank, however, was not rescued in May 1982 and went bankrupt. Thus, there was evidence which indicated that the farm size was the sole selection criterion in government bailouts in the banking sector. However, this is not entirely true, as the bankruptcies of Lehman Brothers and Washington Mutual ( the largest U.S. building society ) in September 2008 show ( Washington Mutual had to be notverkauft to JP Morgan, the fourth largest investment bank Lehman was liquidated ).
Other recent examples are emergency measures in the financial crisis starting in 2007, as for Fannie Mae and Freddie Mac.
The authorship of the sentence " If a database is too big to fail, it is too big" is attributed to the economist Hyman P. Minsky. 2011 called Harvey Rosenblum in the annual report of the Federal Reserve Bank of Dallas, to smash to large banks in order to take the " path of prosperity ."
Relevant system
For credit institutions has become " systemically important " since the financial crisis starting in 2007 for the rescue of ailing banks, the term "system -supporting" or " systemic" emerged. The salvage values institute ( or a group of institutions ) of a state plays because of the size or importance of a particular role in the context of the credit system and therefore may at any state aid as the first count on a government assistance. What "system relevant" means in concrete terms is prudentially defined for Germany. System are relevant then institutions whose inventory risk could be due to their size that trigger the intensity of their inter-bank relationships and their close ties with foreign countries significant negative knock-on effects on other banks and lead to instability of the financial system. The classification as systemically relevant institutions be made by agreement between BaFin and the Bundesbank. The term " systemically important " is, therefore, content is a synonym for the financial doctrine "too big to fail".
The larger the company, the greater the effects on other economic operators. In these cases, it will come with increased likelihood of bailouts by creditors, competitors or the state to reduce or even eliminate these effects. Therefore, in many cases the assumption is expressed that companies of a certain size "too big to fail" would be, and thus may no longer be insolvent ( a concrete example of a " systemically important " bank is the " Hypo Real Estate" (HRE ), which, inter alia, in the Federal Republic of very many urban or state property financed ).
In March 2009 the head of the Federal Reserve Ben Bernanke pointed out that the state has in a crisis strong motivation to avoid the insolvency of large, interconnected firms because of the negative impact of a failure. At the same time, however, he stressed that there was adverse effects on market participants, if a particular company would be classified as "too big to fail":
- Market discipline is reduced and excessive risk-taking is encouraged.
- It is created to be classified as "too big to fail" an artificial stimulus to the growth.
- Smaller companies sidelined because they can not be expected due to size with a " bail- out".
- Government bail- outs are for the taxpayer expensive ( but also very lucrative ) as Citigroup, AIG, Freddie Mac and have more proven.
Even with the support by the Financial Market Stabilization Fund, the importance of the company for the financial stability plays a role. The same applies to the discussion of a bank levy, to bear higher tax rates of the large companies.
The Financial Stability Board has submitted a list of 28 systemically important banks in the world.
Interbank trading
The interbank trade gives banks the world the opportunity to network with each other so strongly that they are " too interconnected to be lost " themselves as able to present ( " too interconnected to fail" ). This may mean that governments would weigh fear of the consequences of contagion sure if they can go bankrupt, a highly cross-linked bank. This creates perverse incentives in the context of a moral hazard. After all, banks can even construct an implicit existence guaranteed by the entering into lower net, but high gross positions particularly with derivatives, particularly if they are otherwise not large enough to avoid drowning ( " too big to fail "). In March 2008, for example, the small and rather insignificant investment bank Bear Stearns was saved because she was considered too interconnected. The more credit derivatives (especially credit default swaps) sold a bank, as guarantor, the higher is therefore the probability that the institution will be saved in an emergency by the state. Nevertheless is therefore a credit institution not "too big to fail", so it has chances of rescue, when it is " too interconnected to fail".
Effects
When companies or business partners assume a company is protected because of its size prior to any threat of insolvency, this creates incentives to take risks that would otherwise not received. Critical is regarded by some economists, if central banks define criteria in advance when large companies are saved. This would create incentives for taking big risks at the expense of the general public ( moral hazard) and at the expense of personal responsibility. John Taylor calls the other hand, by the U.S. central bank credible and transparent principles for government intervention.
According to calculations by the U.S. economist Dean Baker and Travis McArthur correspond in the U.S., the "too -big- to- fail" state guarantees state subsidy payments an absolute value between 5 and 35 billion U.S. dollars annually. A study by Beatrice Weder di Mauro and Kenichi Ueda is among other things to the conclusion that the German banks would be valued at four to five rating levels worse without the unspoken state guarantees.