Question

The moral hazard created by a government safety net and the desire to prevent financial institution failures have presented financial regulators with a particular quandary: the too- big-to-fail (TBTF) phenomenon. Explain the TBTF concept, including one major cost and one major benefit.

Answer 1

TBTF Concept

Too big to fail(TBTF) is a concept that explains the support the government extends to a business when it becomes large. This is done by the government to prevent the company going for failure status as such failure would effect the economy. If large companies face the situation of failure, then other companies which is dependent on this company for rther income and the employment opportunities that the company offer will be effetced to a large extent.

One major cost of TBTF concept is the cost of bailout. This nothing but offering support to the failing business in the form of cash, stocks etc.

One major benefit is again bailout. This is because the government is supporting the company from becoming fail. This will protect the economy as wel as the interest of other companies doing bsiness with this company.