Perception Of Too Big To Fail Remains: NY Fed Researchers

Managing perception is an important part of securing the financial sector. If people don’t believe their deposits are safe they will run on the banks (as we’ve seen recently in Greece), but if investors believe large banks are too big to fail they will happily fund unreasonable risks. So even though post-crisis has increased bank capital and liquidity and made plans for winding down the largest bank holding companies (BHC), it can’t be called a complete success unless the market believes that the era of financial bailouts has ended.

“The evidence suggests that rating agencies and market participants may have some doubts about the ability, so far, of the Dodd-Frank Act to deal with ‘too big to fail’,” write NY...