Apresentação de Moeda Flashcards
Explain the TBTF concept
A too-big-to-fail firm is one whose size, complexity, interconnections, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences.
The actions taken by the government are justified as being necessary because the costs of not bail-out would be higher than the benefits.
Explain the role of moral hazard as a component of TBTF
Small firms give deposits to large institutions because they believe that large banks and institutions will not fail. As a result they ask for a smaller compensation for facing risk ,thus weakening the market discipline and stability. The institutions will grow more and more to detriment of the eocnomic stability and efficiency.
