‘Too big to fail’—or ‘TBTF’—is a popular metaphor for a core dysfunction of today’s financial system: the recurrent pattern of government bailouts of large, systemically important financial institutions. Ten years after the eruption of a global financial crisis that made it a household term, TBTF continues to frame much of the public policy debate on financial stability and regulation. Yet, the analytical content of this term remains remarkably unclear. In many ways, it still functions as the discursive equivalent of the familiar ‘you know it when you see it’ approach.

In a forthcoming article, I attempt to take a fresh look at the nature of the TBTF problem in finance and to offer a coherent framework for understanding the cluster of closely related, but conceptually distinct, regulatory and policy challenges this label actually denotes. As a starting point, I identify the fundamental paradox at the heart of the TBTF idea: TBTF is an entity-centric, micro-level metaphor for a complex of interrelated systemic, macro-level problems. While largely unacknowledged, this inherent tension between the micro and the macro, the entity and the system, critically shapes the design and implementation of the key post-2008 regulatory reforms in the financial sector.

To trace these dynamics, I deconstruct the TBTF metaphor into its two basic components: (1) the ‘F’ factor focused on the ‘failure’ of individual financial firms; and (2) the ‘B’ factor focused on their ‘bigness’ (ie, relative size and structural significance). Isolating and examining these conceptually distinct components helps to explain why the failure (and the associated bailout) of individual firms—or the ‘F’ factor—continues to be the principal focus of the ongoing TBTF policy debate, while the more explicitly structural, relational issues associated with financial firms’ ‘bigness’—or the ‘B’ factor—remain largely in the background of that debate.  

Furthermore, analysing post-crisis legislative and regulatory efforts to solve the TBTF problem through this two-factor lens reveals critical gaps in that process, which consistently favours the inherently micro-level ‘F’ factor solutions over the more explicitly macro-level ‘B’ factor ones. Operationalizing these insights, the article suggests potential ways of rebalancing and expanding the TBTF policy toolkit to encompass a wider range of measures targeting the relevant systemic dynamics in a more direct and assertive manner. Admittedly, implementing such novel, deliberately structural measures would require a qualitative shift in the way we think and talk about the financial system and its dysfunctions—not an easy precondition to meet in practice. Yet, as I argue in the article, this deep attitudinal shift is the necessary first step toward finally achieving the lofty—and persistently elusive—goal of eliminating the TBTF phenomenon in finance.

Saule T. Omarova is a Professor of Law at Cornell University Law School.