[Excerpt] “Financial institutions labeled “Too Big To Fail” (TBTF) are those whose insolvency could shake the foundations of the U.S. financial system and our economy. The term “too big to fail” became part of our popular vocabulary in the wake of federal bank regulatory intervention to prevent the failure of Continental Illinois National Bank in 1984. After the banking and savings-and-loan crisis of the 1980s, the pros and cons of the TBTF policy were extensively debated. Despite Congressional efforts to limit application of TBTF, the doctrine has returned with renewed vigor during the current crisis. Responding on an ad hoc basis, federal banking regulators have employed a TBTF policy to prevent what Federal Reserve Chairman Ben Bernanke saw as potential for the “second Great Depression.” Once the floodgates opened, Sunday announcements concerning bailout deals became the new business-as-usual.
Size is not the sole criterion for TBTF. The institutions marked for government bailout to prevent failure are described as “too big to liquidate” and “too interconnected to fail.” The Obama administration’s plan for regulatory reform calls these institutions “Tier 1 Financial Holding Companies” or “Tier 1 FHCs,” defined as “[a]ny financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed.” Internationally, these institutions have been referred to as “large complex financial institutions” or “LCFIs.””
Ann Graham, Bringing to Heel the Elephants in the Economy: The Case for Ending “Too Big To Fail”, 8 Pierce L. Rev. 117 (2010), available at http://scholars.unh.edu/unh_lr/vol8/iss2/3