	Introduction

Although "too big to fail" (TBTF) has been a perennial policy issue, it was highlighted by the near-collapse of several large financial firms in 2008. Fannie Mae and Freddie Mac (government-sponsored enterprises) entered government conservatorship and were kept solvent with government funds. The Federal Deposit Insurance Corporation (FDIC) arranged for Wachovia (a commercial bank) and Washington Mutual (a thrift) to be acquired by other banks without government financial assistance. Systemic risk mitigation, including eliminating the TBTF problem, was a major goal of the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter, the Dodd-Frank Act; P.L. Different parts of this legislation jointly address the "too big to fail" problem through requirements for enhanced regulation for safety and soundness for "systemically important" (also called "systemically significant") financial institutions (SIFIs), limits on size and the types of activities a firm can engage in (including proprietary trading and hedge fund sponsorship), and the creation of a new receivership regime for resolving failing non-banks that pose systemic risk. In addition, Basel III, an international agreement, placed heightened requirements on the largest banks. Title IV of the Economic Growth, Regulatory Relief, and Consumer Protection Act ( P.L. By international standards, U.S. banks are not that large, however. Moral hazard refers to the theory that if TBTF firms expect that failure will be prevented, they have an incentive to take greater risks than they otherwise would because they are shielded from at least some negative consequences of those risks. Creditors, account holders, and counterparties have generally been shielded from any losses. Do TBTF Firms Enjoy a Funding Advantage or Implicit Subsidy? Policy options for TBTF can be categorized as preventive (how to prevent TBTF firms from either emerging or posing systemic risk) or reactive (how to contain the fallout when a TBTF firm experiences a crisis). A comprehensive policy is likely to incorporate more than one approach because different approaches are aimed at different parts of the problem. These authorities were also used to create broadly based emergency programs. 115-174 , allows the Federal Reserve to prevent mergers and acquisitions, restrict the products a firm is allowed to offer, terminate activities, and sell assets if the Federal Reserve and at least two-thirds of FSOC believe that a firm that has more than $250 billion in assets poses a "grave threat to the financial stability of the United States." Prudential regulation, such as capital requirements, could be set to hold TBTF firms to higher standards than other financial firms, whether or not those firms are already subject to prudential regulation. FSOC has designated three insurers (AIG, Metlife, and Prudential Financial) and one other firm (GE Capital) as systemically important, and therefore subject to heightened prudential regulation, but only Prudential Financial's designation remains in place. As a result, FSOC rescinded GE Capital's designation on June 28, 2016. 115-174 raised the $50 billion threshold to $250 billion in assets, but granted the Fed discretion to apply individual enhanced prudential provisions to individual BHCs with assets between $100 billion and $250 billion if it would promote financial stability or the institution's safety and soundness. To date, this has happened once. The Dodd-Frank Act addresses this issue by designating financial market utilities for enhanced prudential regulation and emergency access to Fed lending, but critics argue that designation causes moral hazard by creating expectations that they will be rescued. Title II of the Dodd-Frank Act created the Orderly Liquidation Authority (OLA), a resolution regime for any financial firm whose failure would have "serious adverse effects on financial stability." Policy before the financial crisis could be characterized as an implicit market discipline approach with ambiguity about which firms policymakers considered to be TBTF and how the imminent failure of a systemically important firm might be addressed. Examples of Dodd-Frank Act provisions intended to reduce contagion effects include a special resolution regime for failing systemically important firms (OLA) and placing limits on counterparty exposure to large firms. Some policy approaches are complementary—others could undermine each other. Some take the fact that many of the largest financial firms have become larger since the crisis (at least in dollar terms) as a sign that the TBTF problem has not been solved. 115-174

Title I of the Dodd-Frank Act imposed a number of enhanced prudential regulatory requirements on bank holding companies and foreign banks operating in the United States with over $50 billion in assets, and non-banks designated as systemically important financial institutions (described in the section above entitled " Regulating TBTF ").
Although "too big to fail" (TBTF) has been a long-standing policy issue, it was highlighted by the financial crisis, when the government intervened to prevent the near-collapse of several large financial firms in 2008. Financial firms are said to be TBTF when policymakers judge that their failure would cause unacceptable disruptions to the overall financial system. They can be TBTF because of their size or interconnectedness. In addition to fairness issues, economic theory suggests that expectations that a firm will not be allowed to fail create moral hazard—if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm's riskiness because they are shielded from the negative consequences of those risks. If so, TBTF firms could have a funding advantage compared with other banks, which some call an implicit subsidy.
There are a number of policy approaches—some complementary, some conflicting—to coping with the TBTF problem, including providing government assistance to prevent TBTF firms from failing or systemic risk from spreading; enforcing "market discipline" to ensure that investors, creditors, and counterparties curb excessive risk-taking at TBTF firms; enhancing regulation to hold TBTF firms to stricter prudential standards than other financial firms; curbing firms' size and scope, by preventing mergers or compelling firms to divest assets, for example; minimizing spillover effects by limiting counterparty exposure; and instituting a special resolution regime for failing systemically important firms. A comprehensive policy is likely to incorporate more than one approach, as some approaches are aimed at preventing failures and some at containing fallout when a failure occurs.
Parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) address each of these policy approaches. For example, it created an enhanced prudential regulatory regime administered by the Federal Reserve for non-bank financial firms designated as "systemically important" (SIFIs) by the Financial Stability Oversight Council (FSOC) and banks with more than $50 billion in assets. The Economic Growth, Regulatory Relief, and Consumer Protection Act (P.L. 115-174) raised this threshold to $250 billion in assets, but gave the Federal Reserve discretion to apply individual provisions as needed to banks between $100 billion and $250 billion in assets. Thirteen U.S. bank holding companies and a larger number of foreign banks have more than $250 billion in assets, and FSOC designated three insurers (AIG, MetLife, and Prudential Financial) and GE Capital as systemically important. MetLife's designation was subsequently rescinded by a court decision, and AIG's and GE Capital's designations were rescinded by FSOC. A handful of the largest banks face additional capital, leverage, and liquidity requirements stemming from Basel III, an international agreement. The Dodd-Frank Act also allowed FSOC to designate payment, clearing, and settlement systems as systemically important "financial market utilities" (FMUs) that are subject to enhanced prudential regulation.
The Dodd-Frank Act also created the "orderly liquidation authority" (OLA), a special resolution regime administered by the Federal Deposit Insurance Corporation (FDIC) to take into receivership failing firms that pose a threat to financial stability. This regime has not been used to date, and has some similarities to how the FDIC resolves failing banks. Statutory authority used to prevent financial firms from failing during the crisis has either expired or been narrowed by the Dodd-Frank Act.
The fact that most large firms have grown in dollar terms since the enactment of the Dodd-Frank Act has led some critics to question whether the TBTF problem has been solved and propose more far-reaching solutions, such as repealing parts of the Dodd-Frank Act, breaking up the largest banks, or restoring Glass-Steagall. Others argue that systemic risk regulation should focus on risky financial activities, regardless of firm size. (Fannie Mae and Freddie Mac remain in government conservatorship and have not been addressed by legislation to date.)