Twelve Years after the Financial Crisis—Too-big-to-fail is still with us

ABSTRACT This article comments on the Consultation Report published by the Financial Stability Board (FSB) evaluating the success of regulatory reforms since the global financial crisis of 2007–2009. It argues that the FSB’s assessment of the role of equity is too narrow, being phrased in terms of bankruptcy avoidance and risk-taking incentives, without attention to debt overhang creating distortions in funding choices, the systemic impact of ample equity reducing deleveraging needs after losses, or equity contributing to smoothing of lending and asset purchases over time. The FSB’s treatment of systemic risk also pays too little attention to the mutual interdependence of different parts of the system, which is not well captured by linear causal relationships. Finally, the article points out that bank resolution of systemically important institutions is still not viable, due to lack of political acceptance of single-point-of-entry procedures and bail-in. Within the European Union, this viability is further undermined by the lack of sufficient funding for banks in resolution and the lack of fiscal backstops.