Here is a link provided by FAS to a CRS report on banks being ‘too big to fail’.
FAS = Federation of American Scientists. CRS = Congressional Service Report – done on request by members of Congress by a research service. I have mentioned the FAS before as a source for this kind of information.
I will content myself with a single quote from the above .pdf file. Emphasis mine.
Preventing TBTF firms from failing is argued to be necessary for maintaining the stability of the financial system in the short run. But rescuing TBTF firms is predicted to lead to a less stable financial system in the long run because of moral hazard that weakens market discipline. 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. In general, riskier investments have a higher rate of return to compensate for the greater risk of failure. If TBTF firms believe that they will not be allowed to fail, then private firms capture any additional profits that result from high risk activities, while the government bears any extreme losses. Thus, if TBTF firms believe that they will be rescued, they have an incentive to behave in a way that makes it more likely they will fail.
The report goes on to analyze how connectivity increases risk independently of size.
Some of these banks (Toronto Star article) have literally thousands of subsidiaries, each with its own web of connections. The high subsidiary count makes a Bank Holding Company extremely difficult to ‘parse’ in order to understand risk.
Too big to fail? and thus, too big to trust?