Notes from the Vault
Too Big to Fail
Gerald P. Dwyer
February 2010
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- "Too big to fail" is a policy that results from authorities' choices that shield creditors of failed banks from losses in the failed bank.
- Too big to fail creates a situation in which banks' creditors expect to receive funds from others, such as taxpayers, when banks are unable to pay their obligations.
- While the FDIC Improvement Act of 1991 was expected to reduce the likelihood of banks being too big to fail, events during the 2008 financial crisis clearly indicate that too big to fail is alive and well, at least in financial crises.
Excess Reserves in the 1930s: A Precautionary Tale
Gerald P. Dwyer
January 2010
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- Excess reserves generally are not excess in the sense of being surplus or extra.
- In the 1930s, excess reserves were considered to be surplus, and increases in reserve requirements during that decade were designed to mop up those excess reserves.
- Banks responded to increases in reserve requirements by reducing deposits and restoring some of the excess reserves. This historical observation indicates that reductions in excess reserves are best approached with caution.
This article is revised from the original version published January 19, 2010.
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