The diploma thesis examines the TBTF-Problem with the main focus on systemic risk, moral hazard and distortion of competition. These phenomena are explained as the immediate consequences of the financial institutions oversize. In order to solve the TBTF-Problem I have used teachings of Leopold Kohr’s size theory, which helped to construct a proposal for the reform of financial system structure and to give new perspective on its regulation. According to the theory there is a certain limit from which manageable becomes unmanageable, controllable becomes uncontrollable, and from which further development does not lead to progress, but to collapse. Thus, the problem of modern economic and, in particular, financial system is not the way how to stimulate growth, which became itself own purpose, but how to avert it. When someone at once arrives on the brink of abyss, the reasonable is only to step back. Therefore, the only cure for current financial instability is the division of TBTF institutions that have outgrown manageable proportions. For this purpose I recommend a three-tier financial system by which these ideas are operationalised.
In addition the thesis discuses the regulatory framework, concentration and consolidation of the financial marker in US, that made the genesis of TBTF-Institutions possible. Furthermore I explain US housing bubble and the way of its emergence, including “originate and distribute” model, structured financial products as well as Ponzi scheme as an example of confidence game.
Inhaltsverzeichnis (Table of Contents)
- INTRODUCTION.
- FINANICAL SERVICE SYSTEM COMPONENTS AND THEIR IMPORTANCE.
- HISTORIC DEVELOPMENT OF FINANCIAL SAFETY NETS AND REGULATORY FRAMEWORK
- INTERNATIONALIZATION, MODERNIZATION AND CONSOLIDATION OF THE FINANCIAL INDUSTRY- THE WAY TO THE LATEST FINANCIAL CRISIS ......
- FINANCIAL INTERNATIONALIZATION AND POLICIES.
- FINANCIAL INNOVATION..
- Originate and distribute model – Credit Securitization (Mortgage-backed securities, Collateralized debt obligations and Credit default swaps)
- Rating agencies........
- Short-term financing...........
- CONSOLIDATION OF FINANCIAL INDUSTRY AND MEGAMERGERS - THE GENESIS OF TBTF INSTITUTIONS
- BOOM AND BUST - THE HOUSING BUBBLE.
- THE BOOM
- PONZI SCHEME
- THE BUST.
- Bear Sterns..
- Lehman Brothers
- AIG
- FINANCIAL CRISIS (2008-) - THE BAILOUT OF THE FINANCIAL SYSTEM
- RECAPITALIZATIONS
- DEBT GUARANTEES...
- ASSET PURCHASES OR GUARANTEES
- WHY TO INTERVENE? – SYSTEMIC RISK.
- TRIGGERING EVENT
- PROPAGATION MECHANISM..
- Counterparty contagion.....
- Information contagion .......
- EFFECT ON THE MACROECONOMY
- THE HAZARDS OF MORAL HAZARD
- MORAL HAZARD AND GOVERNMENT OFFICIALS
- MORAL HAZARD AND RISK-TAKING....
- Moral Hazard and Creditors ...........
- Moral Hazard and Shareholders..
- Moral Hazard and financial firms executives..
- Moral Hazard and private investors
- DISTORTION OF COMPETITION
- TOO BIG
- THE SIZE THEORY TEACHINGS
- DEALING WITH MORAL HAZARD.
- THE PHYSICS OF THE FINANCIAL SYSTEM
- CONCLUSION.
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to critically analyze the concept of "Too Big To Fail" (TBTF) institutions in the context of the global financial crisis of 2008. The work examines the historical development of financial safety nets and regulatory frameworks, specifically focusing on the role of TBTF institutions in shaping the crisis. It also analyzes the implications of TBTF policies, exploring the potential moral hazard risks and distortions of competition.- The evolution of financial safety nets and regulatory frameworks.
- The emergence of TBTF institutions and their role in the financial crisis.
- The implications of TBTF policies on moral hazard and competition.
- The relationship between systemic risk and the TBTF concept.
- The size theory teachings as a framework for understanding TBTF issues.
Zusammenfassung der Kapitel (Chapter Summaries)
The introductory chapter sets the stage for the paper by providing a context for the global financial crisis and outlining the shortcomings of the modern global financial system. It highlights the concept of "Too Big To Fail" (TBTF) institutions and the challenges they pose to regulators. The second chapter delves into the components and importance of the financial service system. It explains the complex interplay of various institutions and their role in facilitating economic activity. The third chapter examines the historical development of financial safety nets and regulatory frameworks. It explores the evolution of mechanisms designed to mitigate financial risk, emphasizing the emergence of deposit insurance and other forms of government support. The fourth chapter focuses on the globalization, modernization, and consolidation of the financial industry. It analyses how these trends contributed to the emergence of the financial crisis, including the role of financial innovation, credit securitization, rating agencies, and short-term financing. The fifth chapter delves into the housing bubble, which served as a trigger for the global financial crisis. It examines the boom period, the Ponzi scheme dynamics, and the subsequent bust, focusing on the failures of major financial institutions like Bear Sterns, Lehman Brothers, and AIG. The sixth chapter details the government's response to the financial crisis, specifically the bailout of the financial system. It explores the strategies employed, including recapitalizations, debt guarantees, and asset purchases. The seventh chapter delves into the concept of systemic risk, examining why intervention in the financial system is deemed necessary. It explores the triggering events, propagation mechanisms, and impact of systemic risk on the broader economy. The eighth chapter examines the moral hazard risks associated with government intervention in the financial system. It analyzes the potential for moral hazard among government officials, risk-takers, creditors, shareholders, financial executives, and private investors. The ninth chapter discusses the distortion of competition arising from the TBTF concept. It examines how government intervention and implicit guarantees can create an uneven playing field for financial institutions, potentially leading to inefficiencies. The tenth chapter explores the idea of "Too Big" and its implications for financial stability. It argues that the size of financial institutions can contribute to systemic risk and underscores the importance of addressing this issue. The eleventh chapter presents the size theory teachings as a framework for understanding TBTF issues. It discusses how this theory can help explain the moral hazard problem and the physics of the financial system, offering insights into the dynamics of financial stability.
Schlüsselwörter (Keywords)
The main keywords and focus topics of the text include financial crisis, Too Big To Fail (TBTF), systemic risk, moral hazard, financial regulation, financial innovation, credit securitization, housing bubble, government intervention, financial stability, and size theory. The paper examines the interplay of these concepts in shaping the global financial crisis and its aftermath.- Quote paper
- Vidak Saric (Author), 2011, Too Big To Fail - Concepetual Disputation with Leopold Kohr, Munich, GRIN Verlag, https://www.grin.com/document/170618
