Too big to fail

Rinat D., 14.7-931

What does it mean?

 Too big to fail is a company that's so essential to the global economy that its
failure would be catastrophic. Big doesn't refer to the size of the company.
Instead, it means it's so interconnected with the global economy that its
failure would be a big event.
 Who will pay and how?

 decrease confidence in the banking system

 private sector losses
 slowing GDP
Costly, frustrating, and risky

 Taxpayers should pay for failures of management?

 Solution of the problem went in two directions:

Improving the resilience The financial health of the

of systemically important Bank at the expense of
banks to prevent the creditors
likelihood of defaults by
large financial institutions
Next step

 Legislating to limit its own ability to support large financial institutions in

distress by fully teaching them to "fall right," that is, to take self-healing
steps on its own
Poor progress

 Only Switzerland, the EU, the US and Canada have made the most significant
progress in implementing this
 Bank Recovery and Resolution Directive, 2008
 Task to increase bail-in instruments
 Deadline for the formation of such a "safety cushion" for systemically
important EU banks is January 2024, when, according to the plan of
legislators, banks should acquire a sustainable ability to self – recovery
(sustainable resolvability) due to accumulated capital buffers and issued
bail-in instruments.
Positive externalities

 Formed a large market of bail-in instruments

 Some banks that have increased the ability to self – recovery can claim credit
ratings that exceed the sovereign leve
 Italian UniCredit S. p. A. and Banca Nazionale del Lavoro S. p.a.
The first experience!

 In June 2017, the first Bank to undergo recovery under the new Directive was
the Spanish Banco Popular Español S. A., the sixth largest Bank in the system
with assets of about 147 billion euros at that time.
 Problems: weak asset quality, the need to create significant reserves for
possible losses, pressure on liquidity indicators
 Shareholders ' funds were written off, subordinated instruments were
converted into equity, and the new investor for the troubled Bank was the
more reliable and financially stable Banco Santander.
Accounting for additional levels of state
support in the ratings of private systemically
important banks S&P Global Ratings

December2014 July 2019

Russian scenario

 More than 70% of banking assets in the system account for state-owned banks,
and in the case of hypothetical problems at the level of large state-owned
banks in their rescue, most likely, and so will be involved in public money
 The range of potential investors in bail-in instruments in Russia is very limited
for natural reasons
 Financial stability for customers (especially retailers) seems to be more
important than saving money to bail out financial institutions
Resources

 https://econs.online/articles/ekonomika/globalnye-posledstviya-lokalnykh-
oshibok/
 https://www.thebalance.com/too-big-to-fail-3305617
 https://www.youtube.com/watch?v=-xjAmbqjePo
 https://english-films.com/dramas/77-slishkom-krut-dlya-neudachi-too-big-to-
fail-2011-hd-720-ru-eng.html
Thank you for attention!