Too Big To Fail? Why we can’t afford not to mend our SOEs
It is always tougher to fight and fix than it is to submit and fail, but there isn’t really a choice
The notion “too big to fail” (TBTF) is not new. But it rose to prominence immediately after the 2008 global financial crisis. The US Federal Reserve, albeit somewhat selectively at first, chose to support various major financial institutions rather than risk the global financial meltdown it felt would follow – primarily because of how integral they were to the proper financial functioning of the world economy.
TBTF has less to do with size than it has to do with interconnectivity and the propensity to create systemic risk. That is an important distinction, particularly in the SA context. TBTF is implicitly in play when the existence of any institution is dependent on a government guarantee or bailout to stay in business. This is not necessarily limited to the provision or underwriting of funds. It may also take the form of regulatory protection, price prescription, or tariff impositions.
The rescue by governments of institutions regarded as TBTF has long been criticised. In the case of the 2008 financial crisis, it was argued (correctly, in my view) that by intervening to save large banks, the US government was underwriting their reckless risk-taking in the derivative and sub-prime mortgage markets. Ultimately the taxes of ordinary people were spent on rescuing greedy traders...