Due to the NCUA's unstated too big to fail policy
, shares in corporates were guaranteed, and the four failures were put on business life support.
2) Further, operating under a too big to fail policy created a dilemma for bank regulatory agencies, which had to either leave large depositors at small banks uninsured and create an artificial incentive for large deposits to be shifted to too big to fail banks or cover all deposits at all banks, further reducing market discipline at small banks and increasing the cost of resolving small hank failures.
Two of the goals of FDICIA are to reduce both the potential for systemic problems and bank regulatory agencies' incentives to follow a too big to fail policy.
According to some preliminary analysis, a too big to fail policy may not be needed to protect financial markets.
9) However, implementing a too big to fail policy would protect bank borrowers only to the extent that doing so would prevent contagious runs on viable banks.
While certain problems plague a too big to fail policy, it is nonetheless an effective way to limit systemic risk.
The act aims to reduce the systemic risk associated with ending a too big to fail policy by enhancing the overall stability of the banking system, by reducing the losses when a bank fails, and through targeted reforms that address specific potentially systemic problems.
If policymakers were to conclude that a too big to fail policy is necessary to protect banks that are financial market makers, there would be implications for securities firms that have a similar presence in many financial markets.
Because the FDIC has these powers, invoking a too big to fail policy is not essential for preserving respondent banks' access to the payments system.