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The continued growth and dominance of a small number of too-big-to-fail banks has led to an overly concentrated financial system, created unacceptable moral hazard and systemic risk, thwarted the operation of the free market, and harmed consumers and business borrowers.
The greatest ongoing threat to the safety and soundness of the U.S. banking system is the dominance of a small number of too-big-to-fail megabanks, which have grown even larger since the financial meltdown of 2008. The 12 largest US banks, just 0.002 percent of all US banks, account for 52.6 percent of industry assets, dwarfing the rest of the banking system and posing massive systemic risk.
Because these firms are too big to fail, they act with impunity and court risks that no smaller firm would tolerate. The markets offer them credit at rates that do not reflect their true risk—rates that are subsidized by an implicit taxpayer guarantee. In addition, large or interconnected institutions are too big to manage, too big to prosecute, and their executives are too big to jail.
To address TBTF, we must both reduce the riskiness of megabanks to make it less likely they will fail in the first place and, when an institution is failing, ensure that tools are available to implement an orderly liquidation of the institution without causing a destabilizing systemic impact.