Tag Archives: Too big to fail

Rescuing a SIFI, Halting a Panic: the Barings Crisis of 1890

Eugene White.

The collapse of Northern Rock in 2007 and Bear Sterns, Lehman Brothers, and AIG in 2008 renewed the debate over how a lender of last resort should respond to a troubled systemically important financial institution (SIFI). Based on research in the Bank of England Archive, this post re-examines a crisis in 1890 when the Bank, supported by central bank cooperation, rescued Baring Brothers & Co. and quashed a banking panic and a currency crisis, while mitigating moral hazard.  This rescue is significant because it combined features similar to those mandated by recent U.K., U.S., and European reforms to ensure an orderly liquidation of SIFIs and increase the accountability of senior management (e.g. Title II of the Dodd-Frank Act (2010); the U.K. “Senior Managers Regime”).

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Filed under Banking, Economic History, Financial Stability, Resolution

Who benefits from the implicit subsidy to ‘too big to fail’ banks?

Rhiannon Sowerbutts and Peter Zimmerman

Governments have often supported troubled banks whose failure would damage the wider economy. The expectation of such bailouts amounts to free insurance for those who have lent money to these ‘too big to fail’ (TBTF) banks. This amounts to an ‘implicit subsidy’ from the government, with a value that may be as large as £100bn. But where does this money go? We think most of the benefit goes to those who own or work for banks. But verifying this empirically is a challenge requiring further research.
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Filed under Banking, Financial Stability