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Tuesday, September 6, 2011

Too big to fail, systemic risk and the Dodd-Frank Act

Systemic risk will easily widespread in a system where the financial industry is highly complex, interconnected and governed by several Large and Complex financial institutions (LCFIs). The cost of rescuing giant banks may be too great for the taxpayers’ purse, and the awareness of their systemic importance may encourage them to take greater risks, which is essentially the moral hazard problem.