Does the Too Big to Fail Doctrine Have a Future?

Abstract

The global financial crisis proved that  the Too Big to Fail /TBTF/ doctrine is an  issue which needs a solution. Currently, the  solution is found in a number of regulatory  measures undertaken on EU level directed  to the systemically important banks. These  measures in the field of supervision, resolution  framework, protection of depositors and  bank structures are discussed in this paper.  The paper is structured in five sections –  review of the TBTF issue, the enhanced  supervision on systemically important banks  in the euro area, the implementation of  resolution mechanisms for the banks, the  implementation of minimum required eligible  liabilities /MREL/ and total loss absorbing  capacity /TLAC/ for the global systemically  important banks, the changes in the  financial safety net, mainly the creation of  the European Deposit Insurance Scheme,  and the initiative for the banking structural  reform. The reflection of each measure  on the TBTF doctrine is analyzed in each  section. The paper gives evidence that  these regulatory initiatives undertaken on  the EU level reduce the probability of bail  out of systemically important banks due to  the stronger intensity of banking supervision,  increased loss absorbing capacity of the  systemically important banks, decreased  complexity in their structure and the creation of a stronger deposit insurance scheme on  European level. These regulatory measures  contribute to reducing the systemic risk and  moral hazard which are associated with  the systemically important banks and more  options are provided for the policy makers  except the bail-out of systemically important  banks with public funds.