# What Is "Too Big to Fail?" Definition, History & Key Financial Reforms

## What Is "Too Big to Fail"?

“Too big to fail” describes a business or business sector so ingrained in a financial system or economy that its failure would be disastrous. The term became popular during the 2007-2008 recession, when the government rescued many of the banks and financial institutions that had caused the crisis. Later financial reforms, such as the Dodd-Frank Act, attempted to limit the growth of banking institutions.

The government may consider [bailing out](https://www.investopedia.com/terms/b/bailout.asp) a corporate entity or a market sector, such as Wall Street banks or U.S. carmakers, to prevent damage to the wider economy. Major banks spur ongoing systemic risks and have a good bit of influence despite regulatory efforts.  

### Key Takeaways

*   "Too big to fail" refers to businesses whose failure could harm the economy, prompting government bailouts.
*   The 2007-2008 financial crisis led to major bailouts and the creation of the Troubled Asset Relief Program.
*   The Dodd-Frank Act was introduced in 2010 to prevent future bailouts by enhancing financial regulations.
*   Despite reforms, major banks have grown larger, maintaining influence and posing systemic risks.
*   Critics argue that strict regulations impact the competitiveness of U.S. banks and burden smaller institutions.

![Too Big to Fail](https://www.investopedia.com/thmb/JthOm5S57POQRUsXBr1cttVgZDM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/too-big-to-fail.asp-Final-3058aadb7f4643a1a3b0fdcc27ef8d58.jpg)

*— Investopedia / Yurle Villegas*

## How the 2007-2008 Financial Crisis Shaped Banking

A bailout of Wall Street banks and other financial institutions deemed "too big to fail" occurred during the [global financial crisis of 2007-2008](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp). Following the collapse of [Lehman Brothers](https://www.investopedia.com/terms/l/lehman-brothers.asp), Congress passed the [Emergency Economic Stabilization Act (EESA)](https://www.investopedia.com/terms/e/emergency-economic-stability-act.asp) in October 2008.

The rescue measures included the $700 billion [Troubled Asset Relief Program (TARP)](https://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp), which authorized the U.S. government to purchase distressed assets to stabilize the financial system. After these bailouts, the Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act introduced new rules for financial institutions in 2010.  

> **Important**
>
> “Too big to fail” became a common phrase during the 2007–2008 financial crisis, which led to financial sector reform in the United States and globally.

## Bank Reforms Through History: 1930s to Today

Due to bank failures in the 1920s and 1930s, the [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic.asp) FDIC was created to watch over banks, insure deposits, and reassure people about their savings. It insures accounts up to $250,000 per depositor.

The 21st century saw new challenges for banks, which had developed financial products and risk models that were inconceivable in the 1930s. The 2007–2008 financial crisis exposed unknown consumer and economic risks. 

### Dodd-Frank Act: Strengthening Financial System Stability

Passed in 2010, [Dodd-Frank](https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp) aims to stop future financial bailouts by regulating capital requirements, trading, and lending. It also sets higher standards for [systemically important financial institutions (SIFIs)](https://www.investopedia.com/terms/s/systemically-important-financial-institution-sifi.asp).

### Global Efforts to Regulate Too Big to Fail Banks

The 2007–2008 crisis affected global banks, leading to new rules focusing on "too big to fail" banks. Global SIFIs include Mizuho, BNP Paribas, and Credit Suisse. Regulations are led by the [Basel Committee on Banking Supervision](https://www.investopedia.com/terms/b/baselcommittee.asp), the [Bank for International Settlements](https://www.investopedia.com/articles/03/120903.asp), and Financial Stability Board.

## Major Institutions Deemed Too Big to Fail

The [Federal Reserve (Fed)](https://www.investopedia.com/terms/f/federalreservebank.asp) identifies banks that could threaten U.S. financial stability, including:

*   Bank of America Corp.
*   The Bank of New York Mellon Corp.
*   Citigroup Inc.
*   The Goldman Sachs Group Inc.
*   JPMorgan Chase & Co.
*   Morgan Stanley
*   State Street Corp.
*   Wells Fargo & Co.

Other companies seen as "too big to fail" during the 2007-2008 crisis that needed government help included:

*   General Motors (auto company)
*   AIG (insurance company)
*   Chrysler (auto company)
*   Fannie Mae ([government-sponsored enterprise (GSE)](https://www.investopedia.com/terms/g/gse.asp))
*   Freddie Mac (GSE)
*   GMAC—now Ally Financial (financial services company)  
    

> **Fast Fact**
>
> Fifteen years after the 2008 crisis, banks have grown larger. In 2023, JPMorgan Chase acquired deposits and assets from the failed First Republic Bank.

## Challenges and Critiques of the Too Big to Fail Policy

Policies have been implemented to prevent financial disasters and reduce government intervention. Dodd-Frank, enacted in 2010, limits bank risk-taking by requiring larger reserves. Banks must meet higher asset ratio requirements to address potential distress.

The [Consumer Financial Protection Bureau (CFPB)](https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp) addressed the [subprime mortgage crisis](https://www.investopedia.com/terms/s/subprime-meltdown.asp) and implemented mortgage lending practices that make it easier for consumers to understand the terms of a mortgage agreement.

Critics say rules hurt U.S. firms' competitiveness and unfairly burden small banks that weren't part of the crisis.  

> **Important**
>
> In 2018, some provisions of Dodd-Frank were loosened under President Trump with the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act.

## Is 'Too Big to Fail’ a New Concept?

This term was publicized by U.S. Rep. Stewart McKinney (R-Conn.) in a 1984 congressional hearing, discussing the intervention of the Federal Deposit Insurance Corp. (FDIC) with the Continental Illinois bank. Although the term was previously used, it became more widely known during the global financial crisis of 2007–2008 when Wall Street received a government bailout.

## What Protections Mitigate "Too Big to Fail"?

Regulations have been put in place to require systemically important financial institutions to maintain adequate capital and submit to enhanced supervision and resolution regimes.

After the 2008 collapse of large financial institutions, policies were enacted, including the [Emergency Economic Stabilization Act of 2008](https://www.investopedia.com/terms/e/emergency-economic-stability-act.asp#:~:text=What%20Is%20the%20Emergency%20Economic,restore%20liquidity%20in%20financial%20markets.) (EESA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

## How Did the Troubled Assets Relief Program Assist Banks That Were Too Big to Fail?

The EESA established the [Troubled Assets Relief Program](https://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp) (TARP) authorizing the Treasury secretary to "purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the secretary." Proponents believed vital to minimize the economic damage created by the sub-prime mortgage meltdown.  

## The Bottom Line

The "Too Big to Fail" concept has a potential for causing economic instability and supporting the rationale for government intervention, such as when the pivotal 2007-2008 financial crisis events highlighted the role and impact of the Emergency Economic Stabilization Act of 2008. Significant reforms introduced, such as the Dodd-Frank Act, aimed at mitigating the risks associated with "Too Big to Fail" institutions.

There have been criticisms of these reforms, particularly regarding their impact on the competitiveness of American banks and smaller financial institutions. Ongoing consolidation in the financial industry could pose potential risks in terms of future crises. Current regulatory measures, like capital requirements and enhanced supervision, are effective and important in safeguarding financial stability.

> **Article Sources**
>
> 1.  Cornell Law School, Legal Information Institute. "[Too Big to Fail](https://www.law.cornell.edu/wex/too_big_to_fail)."
>     
> 2.  U.S. Code, House.gov. "[12 USC Ch. 52: Emergency Economic Stabilization](https://uscode.house.gov/view.xhtml?path=/prelim@title12/chapter52&edition=prelim)."
>     
> 3.  U.S. Government Accountability Office. "[Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues](https://www.gao.gov/products/gao-09-359t)."
>     
> 4.  U.S. House of Representatives, Committee on Oversight and Government Reform, via govinfo.gov. “[The Causes and Effects of the Lehman Brothers Bankruptcy](https://www.govinfo.gov/content/pkg/CHRG-110hhrg55766/html/CHRG-110hhrg55766.htm).”
>     
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>     
> 6.  Federal Deposit Insurance Corp. “[About FDIC: What We Do](https://www.fdic.gov/about/what-we-do/).”
>     
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>     
> 8.  U.S. Congress. “[H.R.4173 — Dodd-Frank Wall Street Reform and Consumer Protection Act](https://www.congress.gov/bill/111th-congress/house-bill/4173).”
>     
> 9.  Financial Stability Board. “[2022 List of Global Systematically Important Banks (G-SIBs)](https://www.fsb.org/wp-content/uploads/P211122.pdf).”
>     
> 10.  Federal Reserve System. “[Large Institution Supervision Coordinating Committee](https://www.federalreserve.gov/supervisionreg/large-institution-supervision.htm).”
>      
> 11.  ProPublica, Bailout Tracker. “[Bailout Recipients](https://projects.propublica.org/bailout/list).”
>      
> 12.  U.S. House of Representatives, Committee on the Judiciary. “[Dodd-Frank Act’s Effects on Financial Services Competition](https://www.govinfo.gov/content/pkg/CHRG-112hhrg74976/pdf/CHRG-112hhrg74976.pdf),” Page 16-17.
>      
> 13.  Congress.gov. "[S.2155 - Economic Growth, Regulatory Relief, and Consumer Protection Act](https://www.congress.gov/bill/115th-congress/senate-bill/2155)."
>      
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>      
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