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Too Big To Save

March 6, 2011

from Baseline:

When things go badly, society, ordinary citizens, and taxpayers get the downside.  This is a classic recipe for financial instability.

Our six largest bank holding companies currently have assets valued at just over 63 percent of GDP (end of Q4, 2010).  This is up from around 55% of GDP before the crisis (e.g., 2006) and no more than 17% of GDP in 1995.    With assets ranging from around $800 billion to nearly $2.5 trillion, these bank holding companies are perceived by the market as “too big to fail,” meaning that they are implicitly backed by the full faith and credit of the US government.  They can borrow more cheaply than their competitors and hence become larger.

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