Too-Big-to-Fail Bank (TBTF) — What It Is & List of US Banks

For those old enough to remember, the sudden failure of Silicon Valley Bank in March 2023 dredged up uneasy memories of the late-2000s financial crisis. Back then, the world’s biggest banks teetered on the brink of implosion, and ordinary people worried — rightfully so — whether their money was safe, even in “too-big-to-fail” banks.

Silicon Valley Bank’s failure didn’t spark a full-blown financial crisis. But it did rekindle debate about where to draw the line. It could lead to a more fundamental rethinking of what “too big to fail” should mean. 

What Is a Too-Big-to-Fail Bank?

A too-big-to-fail bank is a financial institution that would cause significant economic damage if it went out of business.

Also known as “systemically important” banks, they each have hundreds of billions or trillions of dollars in assets. They play important roles in virtually every sector of the economy. 

If you imagine the American economy as a big-city water system, too-big-to-fail banks are the massive water mains branching off from the main water treatment plant. When one bursts, whole neighborhoods flood.

Because they’re so important, these banks are subject to strict supervision by American bank regulators. The Federal Reserve’s Large Institution Supervision Coordinating Committee has overseen systemically important U.S.-based banks since 2010.

Which Banks Are Too Big to Fail Today?

Which banks make the too-big-to-fail list depends on your definition of too big to fail, thus the debate. Within the U.S., there are the officially too-big-to-fail banks (they’re on the Large Institution Supervision Coordinating Committee’s list) and there are unofficially too-big-to-fail banks (they’re not on the list, but it could still be a problem). And that’s before you even get to the international banks.

List of Banks That Are Officially Too Big to Fail

As of 2023, eight American banks qualify as too big to fail in the narrowest sense — that is, they’re under the jurisdiction of the Large Institution Supervision Coordinating Committee. Those banks are:

  • JPMorgan Chase
  • Citigroup
  • Bank of America 
  • Wells Fargo
  • BNY Mellon 
  • Goldman Sachs
  • Morgan Stanley
  • State Street

JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo are by far the biggest banks in the United States by assets. They each serve millions of consumers and businesses and manage a significant portion of the total U.S. money supply.

Though smaller, the other four have massive investment banking operations. They’re crucial to the smooth functioning of the U.S. economy while also having the unique ability to threaten its foundations.

Other Banks Considered Too Big to Fail

The systemically important banks aren’t the only ones U.S. regulators consider too big to fail. 

After the late-2000s financial crisis, the Dodd-Frank Act established a new regulatory framework for banks with more than $50 billion in assets. The Federal Reserve supervises these enhanced supervision banks much more closely than smaller banks.

As the economy grew, so did the number of banks above the $50-billion level. By 2018, several dozen made the cut. That’s also the year Congress raised the enhanced supervision threshold to $250 billion in assets. Notably, Silicon Valley Bank had more than $50 billion but less than $250 billion in assets when it went under.

Too-Big-to-Fail Banks Outside the United States

Outside the United States, the definition of “too big to fail” is not as clear-cut. 

It’s safe to assume that the 20 biggest banks in the world are all too big to fail. But as in the U.S., many smaller institutions qualify as too big to fail due to their systemic importance. 

For example, the Chinese government has treated troubled real estate lender Evergrande as too big to fail due to the vital role it plays in that country’s property market.

Which Banks Don’t Qualify as Too Big to Fail?

In the United States, any bank with less than $250 billion in assets is technically not too big to fail. But in practice, federal bank regulators sometimes suspend the rules for larger banks they deem vital to the economy.

We don’t have to go very far back to find good examples. Of the three U.S.-based banks that failed in March 2023, two had more than $100 billion in assets: Silicon Valley Bank (about $200 billion) and Signature Bank (about $110 billion). 

Bank regulators allowed both to fail, wiping out their shareholders. Following the usual process for when banks face severe financial distress, the Federal Deposit Insurance Corporation temporarily took over Silicon Valley Bank and Signature Bank so customers could continue to use their accounts and access their funds. It then began the process of winding down the banks and seeking buyers for their assets.

However, regulators took the extraordinary step of insuring all deposits in both banks, including those above the customary $250,000 limit on FDIC insurance. Their thinking was that if they let billions of dollars in uninsured deposits evaporate in an uncontrolled bank failure, consumers and businesses would panic and set off a widespread bank run that could devastate the economy. By implication, they admitted that Silicon Valley Bank and Signature Bank were essentially too big to fail.

A Brief History of Too-Big-to-Fail banks

The too-big-to-fail concept long predates the late-2000s financial crisis, when it burst into the public consciousness with the failure of Lehman Brothers and federal bailouts of other big banks. Amid fundamental changes in how Americans bank and the fallout from the March 2023 bank failures, it could be due for another rethinking.

Origins of Too-Big-to-Fail

For a comprehensive history of the origins and early history of too-big-to-fail, read Robert L. Hetzel’s 1991 paper “Too Big to Fail: Origins, Consequences, and Outlook.” 

From his vantage point of the later stages of the 1980s savings and loan crisis, which saw hundreds of mostly small and midsize community banks fail, Hetzel tracks 40 years of regulatory thinking and action around failing or failed banks. 

As early as 1950, he writes, the FDIC had the legal authority to prevent banks from failing when it deemed them “essential to provide adequate banking service in its community.” That gave the FDIC a lot of leeway to prop up banks of any size with short-term loans and other forms of financial support.

The FDIC’s capabilities further expanded in 1982, when the Garn-St. Germain Act gave it the authority to find other banks to purchase or take over failed banks’ assets and liabilities. Previously, when it allowed a bank to fail, the FDIC would simply supervise its liquidation — the rapid sale of its assets, often at steep discounts. 

That was a positive change for bank customers. It lessened the period of uncertainty following a bank’s failure and reduced interruptions in loan servicing, funds access, and other essential banking services.

The FDIC exercised its power to prevent bank failures several times after 1950, but not always because it deemed distressed banks too big to fail. For example, in the early 1970s, it propped up Boston-based Unity Bank and Detroit-based Bank of the Commonwealth over concerns that their failures would hinder financial access and capacity for those cities’ Black communities during a period of heightened racial tensions.

In 1984, the FDIC intervened to prevent the failure of Continental Illinois National Bank and Trust, which was at one time the seventh-largest commercial bank in the United States. With $40 billion in assets and a vast business loan portfolio, Continental Illinois was a clear-cut example of a too-big-to-fail bank. Like Silicon Valley Bank, it also had an unusually high share of uninsured deposits — about 90% — which meant tens of billions of dollars could evaporate in an uncontrolled failure. That would have damaged an economy that was just emerging from a severe recession and spiraling inflation.

Glass-Steagall Repeal Raises the Stakes for for Big Banks

For most of the 20th century, the Glass-Steagall Act of 1933 enforced separation of retail banking operations (taking deposits and making loans) from investment banking operations (investing in companies directly, trading stocks, and other market activities). Basically, banks had to choose one or the other — the same institution couldn’t be both a retail bank and an investment bank.

That changed in 1999, when Congress repealed the most important provisions of the Glass-Steagall Act. A cascade of mergers between big retail banks and big investment banks followed. These mergers were mutually beneficial because they enabled retail banks to participate in much more profitable investment banking activities while giving investment banks access to billions of dollars in customer deposits.

But the newly combined institutions are much bigger than before. And because investment banking is riskier than retail banking, they pose a much greater risk to the financial system and broader economy.

It didn’t take long for bank regulators to learn just how great that risk was. By 2008, the financial system faced a full-blown crisis brought about (in part) by Glass-Steagall repeal.

Bear Stearns: Too Big to Fail, Sort Of

Bear Stearns was the first big investment bank to run into trouble during the late-2000s financial crisis. 

Its troubles came to a head in March 2008, when credit rating agency Moody’s downgraded the junky mortgage-backed securities on Bear Stearns’ balance sheet. Investors fled, pulling billions in cash and sending Bear Stearns’ stock price through the floor. 

The Federal Reserve signaled its willingness to keep Bear Stearns from failing by extending an emergency loan through JPMorgan Chase, which handled the investment bank’s cash. But because Bear Stearns’ mortgage-backed securities were basically worthless, JPMorgan Chase balked. Instead, it offered to purchase Bear Stearns at a 93% discount.

Bear Stearns (which had little choice in the matter) and the Federal Reserve both saw that as an acceptable Plan B. To reduce JPMorgan Chase’s risk, the Federal Reserve committed to providing up to $30 billion to fund the transaction — an admission that Bear Stearns was too big to allow it to fail. 

We can’t know for sure, but given JPMorgan Chase’s initial hesitation, it’s likely that the Fed’s commitment proved decisive. Without it, JPMorgan Chase might have walked away and allowed Bear Stearns to collapse entirely. That would have deepened the market’s already grave concerns about banks saddled with bad mortgage debt and probably pulled forward the acute phase of the financial crisis. Instead of the “Lehman moment” that kicked off widespread market panic, we’d be talking about a “Bear Stearns moment.”

Lehman Brothers: Not Too Big to Fail

Lehman Brothers’ troubles were similar to Bear Stearns’. In September 2008, Lehman announced it would write off billions in toxic mortgage debt and spin off tens of billions more into a separate company. But that accounted for only a small portion of its total exposure to mortgage debt. Investors rightly feared further write-offs and worried about the bank’s ability to stay in business. 

Lehman’s stock tanked, and bank leaders scrambled to find a buyer. Bank of America thought about it but ultimately decided to buy Merrill Lynch, a somewhat less troubled investment bank. Barclays nibbled at Lehman’s U.K. operations but was stymied by British regulators.

Finally, Lehman turned to the Federal Reserve, expecting it would come to their rescue as it had Bear Stearns a few months earlier. But it wasn’t to be. 

Having paid a heavy political price for the Bear Stearns intervention, which was widely seen as a bailout for fat-cat Wall Streeters, the beleaguered George W. Bush administration refused to bless another investment bank rescue. 

Lehman declared bankruptcy on Sept. 15, 2008, sending global markets into a tailspin. Fearing financial contagion — a cascade of major bank failures — U.S. policymakers sprang into action. After a false start that set off a fresh round of market turmoil, Congress authorized the $700 billion Troubled Asset Relief Program to stabilize the banking sector.

After the Financial Crisis: Dodd-Frank Act Passage & Partial Repeal

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. 

Among many other aims, Dodd-Frank sought to reduce the likelihood of future financial crises by strengthening the Federal Reserve’s bank oversight capabilities. Nodding to the political cost of the 2008 bank bailouts, the law promised “to protect the American taxpayer by ending bailouts” and end too big to fail.

We know now that Dodd-Frank did neither. It didn’t break up big banks into components small enough to safely fail on their own. Nor did it end the sorts of extraordinary measures most people think of as bailouts, like the blanket protection of uninsured bank deposits — though, thankfully, we haven’t yet had a repeat of the 2008 calamity. 

Dodd-Frank did legitimately strengthen bank oversight, however. It set up a strict new oversight framework for banks with $50 billion or more in assets. Even in 2010, dozens of U.S.-based banks cleared that threshold. The result was that tens of millions of Americans banked with institutions that — in theory — were close to failure-proof.

For eight years, at least. In 2018, Congress removed this oversight framework for banks with under $250 billion in assets, setting the stage for Signature Bank and Silicon Valley Bank to fail.

Rethinking Too Big to Fail in the Age of Social Media & Instant Transfers

Information spreads much faster today than it did in 2008. So does panic.

Unlike Bear Stearns and Lehman, Silicon Valley Bank and Signature Bank weren’t sitting on tens or hundreds of billions in worthless mortgage debt. 

They had serious financial and structural problems, for sure, but they probably would have survived were it not for a social media-fueled rumor mill that spurred their biggest customers to pull their cash. Silicon Valley Bank customers withdrew $42 billion in the 24-hour period before the bank closed for good.

The banks’ customers were able to withdraw so much money so quickly thanks to the magic of near-instantaneous electronic funds transfers. After all, nervous customers don’t have to queue outside bank branches to withdraw cash anymore. They can transfer their entire balance to another bank without leaving home. 

Despite a lingering aversion to anything that could be perceived as a bank bailout, this new reality likely influenced U.S. regulators’ decision to step in and guarantee uninsured deposits at Silicon Valley Bank and Signature Bank. As those banks teetered, people and businesses were pulling billions from other large regional banks. Regulators worried — probably correctly, though we’ll never know for sure — that inaction would cause much more serious runs at those banks, leading to more bank failures. That would have damaged an already weakened economy.

Final Word

What happens next is anyone’s guess, but it’s clear the people in charge of U.S. bank oversight are rethinking bank supervision and consumer protection. A few days after the March 2023 failures, U.S. President Joe Biden stood at a lectern and assured Americans that their cash was safe in the bank. Though he didn’t say so outright, he strongly implied that regulators might allow individual banks to fail in the future, but they’d guarantee uninsured deposits regardless of the institution’s size.

If that holds, it’s a huge relief for American bank customers, no matter what the future brings.

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