Revisiting “Too Big to Fail”: A Better Approach for Regulating Systemic Risk

By John McDonough, U.S. Treasury, Office of Financial Research

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Large US banks are currently subject to varying levels of enhanced regulatory requirements according to the size of their balance sheets. This sized-based trigger creates perverse incentives, imposes substantial barriers to entry on smaller firms, and fails to account for endogenous factors such as risk propensity, or exogenous factors like inflation. Congress should amend the Dodd-Frank Act to replace size-based regulation with a risk-based approach that reduces the regulatory burden for large banks with relatively lower risk profiles. 

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