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137-440: " Too big to fail " ( TBTF ) is a theory in banking and finance that asserts that certain corporations , particularly financial institutions , are so large and so interconnected that their failure would be disastrous to the greater economic system , and therefore should be supported by government when they face potential failure. The colloquial term "too big to fail" was popularized by U.S. Congressman Stewart McKinney in

274-772: A Wall Street Journal op-ed about the failure of the Dodd–Frank Wall Street Reform and Consumer Protection Act to provide for adequate regulation of large financial institutions. In advance of his March 8 speech to the Conservative Political Action Conference , Fisher proposed requiring breaking up large banks into smaller banks so that they are "too small to save", advocating the withholding from mega-banks access to both Federal Deposit Insurance and Federal Reserve discount window , and requiring disclosure of this lack of federal insurance and financial solvency support to their customers. This

411-721: A hypothesis . If a new theory better explains and predicts a phenomenon than an old theory (i.e., it has more explanatory power ), we are justified in believing that the newer theory describes reality more correctly. This is called an intertheoretic reduction because the terms of the old theory can be reduced to the terms of the new one. For instance, our historical understanding about sound , light and heat have been reduced to wave compressions and rarefactions , electromagnetic waves , and molecular kinetic energy , respectively. These terms, which are identified with each other, are called intertheoretic identities. When an old and new theory are parallel in this way, we can conclude that

548-518: A knowledge transfer where there is a task of translating research knowledge to be application in practice, and ensuring that practitioners are made aware of it. Academics have been criticized for not attempting to transfer the knowledge they produce to practitioners. Another framing supposes that theory and knowledge seek to understand different problems and model the world in different words (using different ontologies and epistemologies ). Another framing says that research does not produce theory that

685-568: A 1984 Congressional hearing, discussing the Federal Deposit Insurance Corporation 's intervention with Continental Illinois . The term had previously been used occasionally in the press, and similar thinking had motivated earlier bank bailouts. The term emerged as prominent in public discourse following the global financial crisis of 2007–2008 . Critics see the policy as counterproductive and that large banks or other institutions should be left to fail if their risk management

822-554: A Financial Stability Board report an increase of the SBS to about $ 67 trillion. It is unclear to what extent various measures of the shadow banking system include activities of regulated banks, such as bank borrowing in the repo market and the issuance of bank-sponsored asset-backed commercial paper. Banks by far are the largest issuers of commercial paper in the United States, for example. As of 2013 , academic research has suggested that

959-442: A cash loan, through the mechanism of selling the security to a lender and agreeing to repurchase it at an agreed time in the future for an agreed price. Money market funds do not rely on short-term funding; rather, they are investment pools that provide short-term funding by investing in short-term debt instruments issued by banks, corporations, state and local governments, and other borrowers. The shadow banking sector operates across

1096-416: A combined asset size of roughly $ 2.2 trillion. Assets financed overnight in triparty repo grew to $ 2.5 trillion. Assets held in hedge funds grew to roughly $ 1.8 trillion. The combined balance sheets of the then five major investment banks totaled $ 4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $ 6 trillion, and total assets of

1233-475: A corporation may be searching for funds to borrow. The shadow banking institution will channel funds from the investor(s) to the corporation, profiting either from fees or from the difference in interest rates between what it pays the investor(s) and what it receives from the borrower. Hervé Hannoun, Deputy General Manager of the Bank for International Settlements described the structure of this shadow banking system at

1370-412: A decrease to $ 24 trillion. Globally, a study of the 11 largest national shadow banking systems found that they totaled $ 50 trillion in 2007, fell to $ 47 trillion in 2008, but by late 2011 had climbed to $ 51 trillion, just over their estimated size before the crisis. Overall, the worldwide SBS totaled about $ 60 (~$ 80.2 trillion in 2023) trillion as of late 2011. In November 2012 Bloomberg reported in

1507-501: A deputy assistant attorney general, who defended the Justice Department's "vigorous enforcement against wrongdoing". Holder has financial ties to at least one law firm benefiting from de facto immunity to prosecution, and prosecution rates against crimes by large financial institutions are at 20-year lows. Four days later, Federal Reserve Bank of Dallas President Richard W. Fisher and Vice-President Harvey Rosenblum co-authored

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1644-413: A financial transaction. The Glass–Steagall Act separated investment and depository banking until its repeal in 1999. Prior to 2008, the government did not explicitly guarantee the investor funds, so investment banks were not subject to the same regulations as depository banks and were allowed to take considerably more risk. Investment banks, along with other innovations in banking and finance referred to as

1781-419: A first step toward being tested or applied in a concrete situation; theorems are said to be true in the sense that the conclusions of a theorem are logical consequences of the axioms. Theories are abstract and conceptual, and are supported or challenged by observations in the world. They are ' rigorously tentative', meaning that they are proposed as true and expected to satisfy careful examination to account for

1918-413: A foundation to gain further scientific knowledge, as well as to accomplish goals such as inventing technology or curing diseases. The United States National Academy of Sciences defines scientific theories as follows: The formal scientific definition of "theory" is quite different from the everyday meaning of the word. It refers to a comprehensive explanation of some aspect of nature that is supported by

2055-435: A given subject matter. There are theories in many and varied fields of study, including the arts and sciences. A formal theory is syntactic in nature and is only meaningful when given a semantic component by applying it to some content (e.g., facts and relationships of the actual historical world as it is unfolding). Theories in various fields of study are often expressed in natural language , but can be constructed in such

2192-515: A lesson to motivate institutions to proceed differently next time. The political power of large banks and risks of economic impact from major prosecutions has led to use of the term "too big to jail" regarding the leaders of large financial institutions. On March 6, 2013, then United States Attorney General Eric Holder testified to the Senate Judiciary Committee that the size of large financial institutions has made it difficult for

2329-623: A loss of depositors and bondholders will be prevented for large banks. However, the Act included an exception in cases of systemic risk, subject to the approval of two-thirds of the FDIC board of directors, the Federal Reserve Board of Governors, and the Treasury Secretary. Bank size, complexity, and interconnectedness with other banks may inhibit the ability of the government to resolve (wind-down)

2466-579: A particular social institution. Most of the following are scientific theories. Some are not, but rather encompass a body of knowledge or art, such as Music theory and Visual Arts Theories. Shadow banking system The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that legally provide services similar to traditional commercial banks but outside normal banking regulations . S&P Global estimates that, at end-2022, shadow banking held about $ 63 trillion in financial assets in major jurisdictions around

2603-447: A recursively enumerable set) in which the concept of natural numbers can be expressed, can include all true statements about them. As a result, some domains of knowledge cannot be formalized, accurately and completely, as mathematical theories. (Here, formalizing accurately and completely means that all true propositions—and only true propositions—are derivable within the mathematical system.) This limitation, however, in no way precludes

2740-723: A safer investment than deposits with smaller banks. Therefore, large banks are able to pay lower interest rates to depositors and investors than small banks are obliged to pay. In October 2009, Sheila Bair , at that time the Chairperson of the FDIC, commented: " 'Too big to fail' has become worse. It's become explicit when it was implicit before. It creates competitive disparities between large and small institutions, because everybody knows small institutions can fail. So it's more expensive for them to raise capital and secure funding." Research has shown that banking organizations are willing to pay an added premium for mergers that will put them over

2877-437: A single textbook. In mathematical logic , a theory has a related but different sense: it is the collection of the theorems that can be deduced from a given set of axioms , given a given set of inference rules . A theory can be either descriptive as in science, or prescriptive ( normative ) as in philosophy. The latter are those whose subject matter consists not of empirical data, but rather of ideas . At least some of

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3014-552: A small set of basic postulates (usually symmetries, like equality of locations in space or in time, or identity of electrons, etc.)—which is capable of producing experimental predictions for a given category of physical systems. One good example is classical electromagnetism , which encompasses results derived from gauge symmetry (sometimes called gauge invariance) in a form of a few equations called Maxwell's equations . The specific mathematical aspects of classical electromagnetic theory are termed "laws of electromagnetism", reflecting

3151-479: A solution to the problem of banks having taxpayer-funded guarantees for their speculative investment banking activities. "If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big. It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure." Theory In modern science,

3288-536: A statistical analysis based on the deviation from the Zipf distribution of the sizes of the world's largest financial entities to infer that the size of the shadow banking system may have been over $ 100 (~$ 131 billion in 2023) trillion in 2012. There are concerns that more business may move into the shadow banking system as regulators seek to bolster the financial system by making bank rules stricter. Like regular banks, shadow banks provide credit and generally increase

3425-426: A tax to internalize the massive costs inflicted by "too big to fail" institution. "When size creates externalities, do what you would do with any negative externality: tax it. The other way to limit size is to tax size. This can be done through capital requirements that are progressive in the size of the business (as measured by value added, the size of the balance sheet or some other metric). Such measures for preventing

3562-1293: A technical standpoint, these institutions are subject to market risk , credit risk and especially liquidity risk , since their liabilities are short term while their assets are more long term and illiquid. This creates a problem, as they are not depositary institutions and do not have direct or indirect access to the support of their central bank in its role as lender of last resort . Therefore, during periods of market illiquidity, they could go bankrupt if unable to refinance their short-term liabilities. They were also highly leveraged. This meant that disruptions in credit markets would make them subject to rapid deleveraging , meaning they would have to pay off their debts by selling their long-term assets. A sell off of assets could cause further price declines of those assets and further losses and selloffs. In contrast to investment banks, money market funds do not go bankrupt—they distribute their assets (which are mainly short-term) pro rata to shareholders if their net asset value falls below $ .9995 per share. Only two funds ever have failed to pay investors $ 1.00 per share. The Reserve Primary Fund paid $ .99 per share to its shareholders and another fund paid its shareholders $ .96 per share in 1994. The securitization markets frequently tapped by

3699-474: A technical term in philosophy in Ancient Greek . As an everyday word, theoria , θεωρία , meant "looking at, viewing, beholding", but in more technical contexts it came to refer to contemplative or speculative understandings of natural things , such as those of natural philosophers , as opposed to more practical ways of knowing things, like that of skilled orators or artisans. English-speakers have used

3836-403: A theory of heat as energy replaced it. Also, the theory that phlogiston is a substance released from burning and rusting material was eliminated with the new understanding of the reactivity of oxygen. Theories are distinct from theorems . A theorem is derived deductively from axioms (basic assumptions) according to a formal system of rules, sometimes as an end in itself and sometimes as

3973-404: A theory's content is based on some formal system of logic and on basic axioms . In a deductive theory, any sentence which is a logical consequence of one or more of the axioms is also a sentence of that theory. This is called the received view of theories . In the semantic view of theories , which has largely replaced the received view, theories are viewed as scientific models . A model

4110-544: A vast body of evidence. Many scientific theories are so well established that no new evidence is likely to alter them substantially. For example, no new evidence will demonstrate that the Earth does not orbit around the sun (heliocentric theory), or that living things are not made of cells (cell theory), that matter is not composed of atoms, or that the surface of the Earth is not divided into solid plates that have moved over geological timescales (the theory of plate tectonics) ... One of

4247-419: A way that their general form is identical to a theory as it is expressed in the formal language of mathematical logic . Theories may be expressed mathematically, symbolically, or in common language, but are generally expected to follow principles of rational thought or logic . Theory is constructed of a set of sentences that are thought to be true statements about the subject under consideration. However,

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4384-421: Is a logical framework intended to represent reality (a "model of reality"), similar to the way that a map is a graphical model that represents the territory of a city or country. In this approach, theories are a specific category of models that fulfill the necessary criteria. (See Theories as models for further discussion.) In physics the term theory is generally used for a mathematical framework—derived from

4521-526: Is a statement that can be derived from those axioms by application of these rules of inference. Theories used in applications are abstractions of observed phenomena and the resulting theorems provide solutions to real-world problems. Obvious examples include arithmetic (abstracting concepts of number), geometry (concepts of space), and probability (concepts of randomness and likelihood). Gödel's incompleteness theorem shows that no consistent, recursively enumerable theory (that is, one whose theorems form

4658-458: Is advocated both to limit risk to the financial system posed by the largest banks as well as to limit their political influence. For example, economist Joseph Stiglitz wrote in 2009 that: "In the United States, the United Kingdom, and elsewhere, large banks have been responsible for the bulk of the [bailout] cost to taxpayers. America has let 106 smaller banks go bankrupt this year alone. It's

4795-408: Is essential to provide adequate banking service". Regulators shunned this third option for many years, fearing that if regionally or nationally important banks were thought generally immune to liquidation, markets in their shares would be distorted. Thus, the assistance option was never employed during the period 1950–1969, and very seldom thereafter. Research into historical banking trends suggests that

4932-498: Is not effective. Some critics, such as economist Alan Greenspan , believe that such large organizations should be deliberately broken up: "If they're too big to fail, they're too big." Some economists such as Paul Krugman hold that financial crises arise principally from banks being under-regulated rather than their size, using the widespread collapse of small banks in the Great Depression to illustrate this argument. In 2014,

5069-598: Is prevalent. The recommendations for G20 leaders on regulating shadow banks were due to be finalised by the end of 2012. The United States and the European Union are already considering rules to increase regulation of areas like securitisation and money market funds, although the need for money market fund reforms has been questioned in the United States in light of reforms adopted by the Securities and Exchange Commission in 2010. The International Monetary Fund suggested that

5206-490: Is relevant to practice. In the context of management, Van de Van and Johnson propose a form of engaged scholarship where scholars examine problems that occur in practice, in an interdisciplinary fashion, producing results that create both new practical results as well as new theoretical models, but targeting theoretical results shared in an academic fashion. They use a metaphor of "arbitrage" of ideas between disciplines, distinguishing it from collaboration. In science,

5343-709: Is under the theory. Sometimes two theories have exactly the same explanatory power because they make the same predictions. A pair of such theories is called indistinguishable or observationally equivalent , and the choice between them reduces to convenience or philosophical preference. The form of theories is studied formally in mathematical logic, especially in model theory . When theories are studied in mathematics, they are usually expressed in some formal language and their statements are closed under application of certain procedures called rules of inference . A special case of this, an axiomatic theory, consists of axioms (or axiom schemata) and rules of inference. A theorem

5480-609: The 2007–2008 financial crisis , investment banks financed mortgages through off-balance-sheet (OBS) securitizations (e.g., asset-backed commercial paper programs) and hedged risk through off-balance sheet credit default swaps . Before the 2008 financial crisis, major investment banks were subject to considerably less stringent regulation than depository banks. In 2008, investment banks Morgan Stanley and Goldman Sachs became bank holding companies , Merrill Lynch and Bear Stearns were acquired by bank holding companies, and Lehman Brothers declared bankruptcy , essentially bringing

5617-739: The Bank for International Settlements (BIS), investment banks and commercial banks may conduct much of their business in the shadow banking system (SBS) although most are not classified as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks. The core activities of investment banks are subject to regulation and monitoring by central banks and other government institutions – but it has been common practice for investment banks to conduct many of their transactions in ways that do not show up on their conventional balance sheet accounting and so are not visible to regulators or unsophisticated investors. For example, before

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5754-471: The Dodd–Frank Act —which promised an end to bailouts—did nothing to raise the price of credit (i.e., lower the implicit subsidy) for the "too-big-to-fail" institutions. One 2013 study (Acharya, Anginer, and Warburton) measured the funding cost advantage provided by implicit government support to large financial institutions. Credit spreads were lower by approximately 28 basis points (0.28%) on average over

5891-572: The Greek language . In the book From Religion to Philosophy , Francis Cornford suggests that the Orphics used the word theoria to mean "passionate sympathetic contemplation". Pythagoras changed the word to mean "the passionless contemplation of rational, unchanging truth" of mathematical knowledge, because he considered this intellectual pursuit the way to reach the highest plane of existence. Pythagoras emphasized subduing emotions and bodily desires to help

6028-541: The International Monetary Fund and others said the problem still had not been dealt with. While the individual components of the new regulation for systemically important banks (additional capital requirements , enhanced supervision and resolution regimes) likely reduced the prevalence of TBTF, the fact that there is a definite list of systemically important banks considered TBTF has a partly offsetting impact. Federal Reserve Chair Ben Bernanke also defined

6165-596: The International Monetary Fund defines the two key functions of the shadow banking system as securitization – to create safe assets, and collateral intermediation – to help reduce counterparty risks and facilitate secured transactions. In the US, before the 2007–2008 financial crisis , the shadow banking system had overtaken the regular banking system in supplying loans to various types of borrower; including businesses, home and car buyers, students and credit users. As they are often less risk averse than regular banks, entities from

6302-417: The International Monetary Fund , showing that when the role of rehypothecation was considered, in the U.S. the SBS had grown to over $ 10 trillion, about twice as much as previous estimates. During 1998, the highly leveraged and unregulated hedge fund Long-Term Capital Management failed and was bailed out by several major banks at the request of the government, which was concerned about possible damage to

6439-579: The Justice Department to bring criminal charges when they are suspected of crimes, because such charges can threaten the existence of a bank and therefore their interconnectedness may endanger the national or global economy. "Some of these institutions have become too large," Holder told the Committee. "It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate." In this he contradicted earlier written testimony from

6576-462: The Volcker Rule , a proposal to ban proprietary trading by commercial banks. Proprietary trading refers to using customer deposits to speculate in risky assets for the benefit of the bank rather than customers. The Dodd–Frank Act as enacted into law includes several loopholes to the ban, allowing proprietary trading in certain circumstances. However, the regulations required to enforce these elements of

6713-436: The capital markets to refinance their operations. When the housing market began to deteriorate and their ability to obtain funds from investors through investments such as mortgage-backed securities declined, these investment banks could not refinance themselves. Investor refusal or inability to provide funds via the short-term markets was a primary cause of the failure of Bear Stearns and Lehman Brothers during 2008. From

6850-452: The liquidity of the financial sector. Yet unlike their more regulated competitors, they lack access to central bank funding or safety nets such as deposit insurance and debt guarantees . In contrast to traditional banks, shadow banks do not take deposits. Instead, they rely on short-term funding provided either by asset-backed commercial paper or by the repo market, in which borrowers in substance offer collateral as security against

6987-710: The over-the-counter (OTC) derivatives market, which grew rapidly in the decade up to the 2007–2008 financial crisis , reaching over US$ 650 trillion in notional contracts traded. This rapid growth mainly arose from credit derivatives . In particular these included: The market in CDS, for example, was insignificant in 2004 but rose to over $ 60 trillion in a few years. Because credit default swaps were not regulated as insurance contracts, companies selling them were not required to maintain sufficient capital reserves to pay potential claims. Demands for settlement of hundreds of billions of dollars of credit default swaps contracts issued by AIG ,

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7124-629: The shadow banking system , grew to rival the depository system by 2007. They became subject to the equivalent of a bank run in 2007 and 2008, in which investors (rather than depositors) withdrew sources of financing from the shadow system. This run became known as the subprime mortgage crisis . During 2008, the five largest U.S. investment banks either failed (Lehman Brothers), were bought out by other banks at fire-sale prices (Bear Stearns and Merrill Lynch) or were at risk of failure and obtained depository banking charters to obtain additional Federal Reserve support (Goldman Sachs and Morgan Stanley). In addition,

7261-479: The subprime mortgage crisis and helping to transform it into a global credit crunch . The shadow banking system has been implicated as significantly contributing to the 2007–2008 financial crisis . In a June 2008 speech, U.S. Treasury Secretary Timothy Geithner, then President and CEO of the New York Federal Reserve Bank, placed significant blame for the freezing of credit markets on a "run" on

7398-638: The $ 1 trillion mark. Shadow institutions typically do not have banking licenses ; they do not take deposits as a depository bank would and therefore are not subject to the same regulations. Complex legal entities comprising the system include hedge funds , structured investment vehicles (SIV), special purpose entity conduits (SPE), money market funds , repurchase agreement (repo) markets and other non-bank financial institutions . Many shadow banking entities are sponsored by banks or are affiliated with banks through their subsidiaries or parent bank holding companies. The inclusion of money market funds in

7535-427: The [ subprime mortgage crisis ] has a single lesson, it is that the too-big-to-fail problem must be solved." Bernanke cited several risks with too-big-to-fail institutions: Prior to the Great Depression , U.S. consumer bank deposits were not guaranteed by the government, increasing the risk of a bank run , in which a large number of depositors withdraw their deposits at the same time. Since banks lend most of

7672-464: The 1990–2010 period, with a peak of more than 120 basis points in 2009. In 2010, the implicit subsidy was worth nearly $ 100 billion to the largest banks. The authors concluded: "Passage of Dodd–Frank did not eliminate expectations of government support." Economist Randall S. Kroszner summarized several approaches to evaluating the funding cost differential between large and small banks. The paper discusses methodology and does not specifically answer

7809-580: The American, European, and Chinese financial sectors, and in perceived tax havens worldwide. Shadow banks can be involved in the provision of long-term loans like mortgages, facilitating credit across the financial system by matching investors and borrowers individually or by becoming part of a chain involving numerous entities, some of which may be mainstream banks. Due in part to their specialized structure, shadow banks can sometimes provide credit more cost-efficiently than traditional banks. A headline study by

7946-506: The Dodd–Frank Act in July 2010 to help strengthen regulation of the financial system in the wake of the subprime mortgage crisis that began in 2007. Dodd–Frank requires banks to reduce their risk taking, by requiring greater financial cushions (i.e., lower leverage ratios or higher capital ratios), among other steps. Banks are required to maintain a ratio of high-quality, easily sold assets, in

8083-410: The Justice Department's prosecutorial philosophy". After receipt of a DoJ response letter, Brown and Grassley issued a statement saying, "The Justice Department's response is aggressively evasive. It does not answer our questions. We want to know how and why the Justice Department has determined that certain financial institutions are 'too big to jail' and that prosecuting those institutions would damage

8220-713: The New Darwinism of the survival of the fittest and the politically best connected should be distinguished from regulatory interventions based on the narrow leverage ratio aimed at regulating risk (regardless of size, except for a de minimis lower limit)." A policy research and development entity, the Financial Stability Board , releases an annual list of banks worldwide that are considered "systemically important financial institutions"—financial organizations whose size and role mean that any failure could cause serious systemic problems. As of 2022, these are: *Note: In

8357-778: The U.S. banking assets in 1998; this rose to 45% by 2008 and to 48% by 2010, before falling to 47% in 2011. This concentration continued despite the subprime mortgage crisis and its aftermath. During March 2008, JP Morgan Chase acquired investment bank Bear Stearns. Bank of America acquired investment bank Merrill Lynch in September 2008. Wells Fargo acquired Wachovia in January 2009. Investment banks Goldman Sachs and Morgan Stanley obtained depository bank holding company charters, which gave them access to additional Federal Reserve credit lines. Bank deposits for all U.S. banks ranged between approximately 60–70% of GDP from 1960 to 2006, then jumped during

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8494-476: The acquisition of assets and assumption of liabilities by another firm. A third option was made available by the Federal Deposit Insurance Act of 1950 : providing assistance, the power to support an institution through loans or direct federal acquisition of assets, until it could recover from its distress. The statute limited the "assistance" option to cases where "continued operation of the bank

8631-564: The aims are different. Theoretical contemplation considers things humans do not move or change, such as nature , so it has no human aim apart from itself and the knowledge it helps create. On the other hand, praxis involves thinking, but always with an aim to desired actions, whereby humans cause change or movement themselves for their own ends. Any human movement that involves no conscious choice and thinking could not be an example of praxis or doing. Theories are analytical tools for understanding , explaining , and making predictions about

8768-517: The annual conference of the South East Asian Central Banks Research and Training Centre (SEACEN). "With the development of the originate-to-distribute model, banks and other lenders are able to extend loans to borrowers and then to package those loans into ABSs , CDOs , asset-backed commercial paper (ABCP) and structured investment vehicles (SIVs). These packaged securities are then sliced into various tranches , with

8905-513: The appearance of superior performance during boom times by simply taking greater pro-cyclical risks. Money market funds have zero leverage and thus do not pose this risk feature of shadow banks. Shadow institutions like SIVs and conduits , typically sponsored and guaranteed by commercial banks, borrowed from investors in short-term, liquid markets (such as the money market and commercial paper markets), so that they would have to repay and borrow again from these investors at frequent intervals. On

9042-482: The asset sizes that are commonly viewed as the thresholds for being too big to fail. A study conducted by the Center for Economic and Policy Research found that the difference between the cost of funds for banks with more than $ 100 billion in assets and the cost of funds for smaller banks widened dramatically after the formalization of the "too big to fail" policy in the U.S. in the fourth quarter of 2008. This shift in

9179-414: The axioms of that field. Some commonly known examples include set theory and number theory ; however literary theory , critical theory , and music theory are also of the same form. One form of philosophical theory is a metatheory or meta-theory . A metatheory is a theory whose subject matter is some other theory or set of theories. In other words, it is a theory about theories. Statements made in

9316-586: The bank without significant disruption to the financial system or economy, as occurred with the Lehman Brothers bankruptcy in September 2008. This risk of "too big to fail" entities increases the likelihood of a government bailout using taxpayer dollars. The largest U.S. banks continue to grow larger while the concentration of bank assets increases. The largest six U.S. banks had assets of $ 9,576 billion as of year-end 2012, per their 2012 annual reports (SEC Form 10K). The top 5 U.S. banks had approximately 30% of

9453-503: The boom but increasing losses during the crisis. New accounting guidance was planned to require them to put some of these assets back onto their books during 2009, with the effect of reducing their capital ratios. One news agency estimated the amount of assets to be transferred at between $ 500 billion and $ 1 trillion. This transfer was considered as part of the stress tests performed by the government during 2009. The shadow banking system also conducts an enormous amount of trading activity in

9590-608: The broader financial system. Structured investment vehicles (SIVs) first came to public attention at the time of the Enron scandal . Since then, their use has become widespread in the financial world. In the years leading up to the crisis, the top four U.S. depository banks moved an estimated $ 5.2 trillion in assets and liabilities off their balance sheets into special purpose vehicles (SPEs) or similar entities. This enabled them to bypass regulatory requirements for minimum capital adequacy ratios , thereby increasing leverage and profits during

9727-436: The construction of mathematical theories that formalize large bodies of scientific knowledge. A theory is underdetermined (also called indeterminacy of data to theory ) if a rival, inconsistent theory is at least as consistent with the evidence. Underdetermination is an epistemological issue about the relation of evidence to conclusions. A theory that lacks supporting evidence is generally, more properly, referred to as

9864-402: The consumption loss associated with National Banking Era bank runs was far more costly than the consumption loss from stock market crashes. The Federal Deposit Insurance Corporation Improvement Act was passed in 1991, giving the FDIC the responsibility to rescue an insolvent bank by the least costly method. The Act had the implicit goal of eliminating the widespread belief among depositors that

10001-471: The crisis to a peak of nearly 84% in 2009 before falling to 77% by 2011. The number of U.S. commercial and savings bank institutions reached a peak of 14,495 in 1984; this fell to 6,532 by the end of 2010. The ten largest U.S. banks held nearly 50% of U.S. deposits as of 2011. Since the full amount of the deposits and debts of "too big to fail" banks are effectively guaranteed by the government, large depositors and investors view investments with these banks as

10138-502: The current $ 250,000. In exchange for the deposit insurance provided by the federal government, depository banks are highly regulated and expected to invest excess customer deposits in lower-risk assets. After the Great Depression, it has become a problem for financial companies that they are too big to fail, because there is a close connection between financial institutions involved in financial market transactions. It brings liquidity in

10275-429: The definition of shadow banking has been questioned in view of their relatively simple structure and the highly regulated and unleveraged nature of these entities, which are considered safer, more liquid, and more transparent than banks. Shadow banking institutions are typically intermediaries between investors and borrowers. For example, an institutional investor like a pension fund may be willing to lend money, while

10412-536: The deposits and only keep a fraction actually on hand, a bank run can render the bank insolvent. During the Depression, hundreds of banks became insolvent and depositors lost their money. As a result, the U.S. enacted the 1933 Banking Act , sometimes called the Glass–Steagall Act , which created the Federal Deposit Insurance Corporation (FDIC) to insure deposits up to a limit of $ 2,500, with successive increases to

10549-583: The development of money market funds in the 1970s – money market accounts function largely as bank deposits, but money market funds are not regulated as banks. The concept of hidden high priority debt dates back at least 400 years to Twyne's Case and the Statute of Bankrupts (1542) in the UK, and to Clow v. Woods in the U.S. These legal cases led to the development of modern fraudulent transfer law. The concept of credit growth by unregulated institutions, though not

10686-451: The discipline of medicine: medical theory involves trying to understand the causes and nature of health and sickness, while the practical side of medicine is trying to make people healthy. These two things are related but can be independent, because it is possible to research health and sickness without curing specific patients, and it is possible to cure a patient without knowing how the cure worked. The English word theory derives from

10823-400: The elementary theorems of a philosophical theory are statements whose truth cannot necessarily be scientifically tested through empirical observation . A field of study is sometimes named a "theory" because its basis is some initial set of assumptions describing the field's approach to the subject. These assumptions are the elementary theorems of the particular theory, and can be thought of as

10960-515: The entire banking system were about $ 10 trillion." In 2016, Benoît Cœuré ( ECB executive board member ) stated that controlling shadow banking should be the focus to avoid a future financial crisis, since the banks' leverage had been lowered. S&P Global estimates that, at end-2022, shadow banking held about $ 63 trillion in financial assets in major global jurisdictions, representing 78% of global GDP, up from $ 28 trillion and 68% of global GDP in 2009. Shadow institutions are not subject to

11097-757: The entities in the shadow banking system by their counterparties. The rapid increase of the dependency of bank and non-bank financial institutions on the use of these off-balance sheet entities to fund investment strategies had made them critical to the credit markets underpinning the financial system as a whole, despite their existence in the shadows, outside of the regulatory controls governing commercial banking activity. Furthermore, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. Economist Paul Krugman described

11234-405: The event of a financial crisis. Some critics have argued that "The way things are now banks reap profits if their trades pan out, but taxpayers can be stuck picking up the tab if their big bets sink the company." Additionally, as discussed by Senator Bernie Sanders , if taxpayers are contributing to rescue these companies from bankruptcy, they "should be rewarded for assuming the risk by sharing in

11371-404: The event of financial difficulty either at the bank or in the financial system. These are liquidity requirements. Since the 2008 crisis, regulators have worked with banks to reduce leverage ratios. For example, the leverage ratio for investment bank Goldman Sachs declined from a peak of 25.2 during 2007 to 11.4 in 2012, indicating a much-reduced risk profile. The Dodd–Frank Act includes a form of

11508-410: The exception of conforming mortgages, which could be sold to Fannie Mae and Freddie Mac . U.S. Treasury Secretary Timothy Geithner has stated that the "combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles." In January 2012, the global Financial Stability Board announced its intention to further regulate the shadow banking system, in

11645-455: The financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect." One former banking regulator has said that regulated banking organizations are the largest shadow banks and that shadow banking activities within

11782-487: The financial system." Kareem Serageldin pleaded guilty on November 22, 2013, for his role in inflating the value of mortgage bonds as the housing market collapsed, and was sentenced to two and a half years in prison. As of April 30, 2014, Serageldin remains the "only Wall Street executive prosecuted as a result of the financial crisis " that triggered the Great Recession . The much smaller Abacus Federal Savings Bank

11919-699: The following definition in November 2013: "Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions—but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper [ABCP] conduits, money market funds , markets for repurchase agreements , investment banks , and mortgage companies" Shadow banking has grown in importance to rival traditional depository banking, and

12056-504: The gains that result from this government bailout". In this sense, Alan Greenspan affirms that, "Failure is an integral part, a necessary part of a market system." Thereby, although the financial institutions that were bailed out were indeed important to the financial system, the fact that they took risk beyond what they would otherwise, should be enough for the Government to let them face the consequences of their actions. It would have been

12193-819: The government provided bailout funds via the Troubled Asset Relief Program in 2008. Fed Chair Ben Bernanke described in November 2013 how the Panic of 1907 was essentially a run on the non-depository financial system, with many parallels to the crisis of 2008. One of the results of the Panic of 1907 was the creation of the Federal Reserve in 1913. Before 1950, U.S. federal bank regulators had essentially two options for resolving an insolvent institution: 1) closure, with liquidation of assets and payouts for insured depositors ; or 2) purchase and assumption, encouraging

12330-488: The highly rated tranches going to the more risk-averse investors and the subordinate tranches going to the more adventurous investors." This sector was worth an estimated $ 60 trillion in 2010, compared to prior FSB estimates of $ 27 trillion in 2002. While the sector's assets declined during the 2007–2008 financial crisis , they have since returned to their pre-crisis peak except in the United States where they have declined substantially. A 2013 paper by Fiaschi et al. used

12467-443: The intellect function at the higher plane of theory. Thus, it was Pythagoras who gave the word theory the specific meaning that led to the classical and modern concept of a distinction between theory (as uninvolved, neutral thinking) and practice. Aristotle's terminology, as already mentioned, contrasts theory with praxis or practice, and this contrast exists till today. For Aristotle, both practice and theory involve thinking, but

12604-466: The interests of the real economy. The term "shadow banking system" is attributed to Paul McCulley of PIMCO , who coined it at Federal Reserve Bank of Kansas City 's Economic Symposium in Jackson Hole , Wyoming in 2007 where he defined it as "the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures." McCulley identified the birth of the shadow banking system with

12741-416: The large banks' cost of funds was in effect equivalent to an indirect "too big to fail" subsidy of $ 34 billion per year to the 18 U.S. banks with more than $ 100 billion in assets. The editors of Bloomberg View estimated there was an $ 83 billion annual subsidy to the 10 largest United States banks, reflecting a funding advantage of 0.8 percentage points due to implicit government support, meaning

12878-444: The largest insurance company in the world, led to its financial collapse. Despite the prevalence and volume of this activity, it attracted little outside attention before 2007, and much of it was off the balance sheets of the contracting parties' affiliated banks. The uncertainty this created among counterparties contributed to the deterioration of credit conditions. Since then the shadow banking system has been blamed for aggravating

13015-455: The largest investment banks into the regulated depository sphere. The volume of transactions in the shadow banking system grew dramatically after the year 2000. Its growth was checked by the 2007–2008 financial crisis and for a short while it declined in size, both in the US and in the rest of the world. In 2007 the Financial Stability Board estimated the size of the SBS in the U.S. to be around $ 25 trillion , but by 2011 estimates indicated

13152-404: The law were not implemented during 2013 and were under attack by bank lobbying efforts. Another major banking regulation, the Glass–Steagall Act from 1933, was effectively repealed in 1999. The repeal allowed depository banks to enter into additional lines of business. Senators John McCain and Elizabeth Warren proposed bringing back Glass–Steagall during 2013. Economist Willem Buiter proposes

13289-650: The level of consistent and reproducible evidence that supports them. Within electromagnetic theory generally, there are numerous hypotheses about how electromagnetism applies to specific situations. Many of these hypotheses are already considered adequately tested, with new ones always in the making and perhaps untested. Certain tests may be infeasible or technically difficult. As a result, theories may make predictions that have not been confirmed or proven incorrect. These predictions may be described informally as "theoretical". They can be tested later, and if they are incorrect, this may lead to revision, invalidation, or rejection of

13426-434: The levels projected by their associated agency credit ratings . Commercial mortgage-backed securities suffered from association and from a general decline in economic activity, and the entire complex nearly shut down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds. In February 2009, Ben Bernanke stated that securitization markets remained effectively shut, with

13563-428: The management, owners, or creditors of the firm, but because they recognize that the consequences for the broader economy of allowing a disorderly failure greatly outweigh the costs of avoiding the failure in some way. Common means of avoiding failure include facilitating a merger, providing credit, or injecting government capital, all of which protect at least some creditors who otherwise would have suffered losses. ... If

13700-561: The markets of various financial instruments. The crisis in 2008 originated when the liquidity and value of financial instruments held and issued by banks and financial institutions decreased sharply. In contrast to depository banks, investment banks generally obtain funds from sophisticated investors and often make complex, risky investments with the funds, speculating either for their own account or on behalf of their investors. They also are "market makers" in that they serve as intermediaries between two investors that wish to take opposite sides of

13837-485: The meaning and scope of shadow banking are disputed in academic literature. In China, shadow banking activities are closely associated with commercial banks, involving trust loans, entrusted loans, undiscounted bank acceptance bills, financial products, and interbank business. These activities are often regulated by a weak level and a limited coverage of supervision compared to highly regulated on-balance sheet activities. According to Hervé Hannoun, deputy general manager of

13974-399: The mega-banks that present the mega-costs ... banks that are too big to fail are too big to exist. If they continue to exist, they must exist in what is sometimes called a 'utility' model, meaning that they are heavily regulated." He also wrote about several causes of the subprime mortgage crisis related to the size, incentives, and interconnection of the mega-banks. The United States passed

14111-446: The metatheory about the theory are called metatheorems . A political theory is an ethical theory about the law and government. Often the term "political theory" refers to a general view, or specific ethic, political belief or attitude, thought about politics. In social science, jurisprudence is the philosophical theory of law. Contemporary philosophy of law addresses problems internal to law and legal systems, and problems of law as

14248-436: The most reliable, rigorous, and comprehensive form of scientific knowledge, in contrast to more common uses of the word "theory" that imply that something is unproven or speculative (which in formal terms is better characterized by the word hypothesis ). Scientific theories are distinguished from hypotheses, which are individual empirically testable conjectures , and from scientific laws , which are descriptive accounts of

14385-607: The most useful properties of scientific theories is that they can be used to make predictions about natural events or phenomena that have not yet been observed. From the American Association for the Advancement of Science : A scientific theory is a well-substantiated explanation of some aspect of the natural world, based on a body of facts that have been repeatedly confirmed through observation and experiment. Such fact-supported theories are not "guesses" but reliable accounts of

14522-411: The new one describes the same reality, only more completely. When a new theory uses new terms that do not reduce to terms of an older theory, but rather replace them because they misrepresent reality, it is called an intertheoretic elimination. For instance, the obsolete scientific theory that put forward an understanding of heat transfer in terms of the movement of caloric fluid was eliminated when

14659-517: The other hand, they used the funds to lend to corporations or to invest in longer-term, less liquid (i.e. harder to sell) assets. In many cases, the long-term assets purchased were mortgage-backed securities , sometimes called "toxic assets" or "legacy assets" in the press. These assets declined significantly in value as housing prices declined and foreclosures increased during 2007–2009. In the case of investment banks, this reliance on short-term financing required them to return frequently to investors in

14796-400: The possibility of faulty inference or incorrect observation. Sometimes theories are incorrect, meaning that an explicit set of observations contradicts some fundamental objection or application of the theory, but more often theories are corrected to conform to new observations, by restricting the class of phenomena the theory applies to or changing the assertions made. An example of the former is

14933-540: The profits of such banks are largely a taxpayer-backed illusion. Another study by Frederic Schweikhard and Zoe Tsesmelidakis estimated the amount saved by America's biggest banks from having a perceived safety net of a government bailout was $ 120 billion from 2007 to 2010. For America's biggest banks the estimated savings was $ 53 billion for Citigroup , $ 32 billion for Bank of America , $ 10 billion for JPMorgan , $ 8 billion for Wells Fargo , and $ 4 billion for AIG . The study noted that passage of

15070-494: The question of whether larger institutions have an advantage. During November 2013, the Moody's credit rating agency reported that it would no longer assume the eight largest U.S. banks would receive government support in the event they faced bankruptcy. However, the GAO reported that politicians and regulators would still face significant pressure to bail out large banks and their creditors in

15207-517: The real world. The theory of biological evolution is more than "just a theory." It is as factual an explanation of the universe as the atomic theory of matter or the germ theory of disease. Our understanding of gravity is still a work in progress. But the phenomenon of gravity, like evolution, is an accepted fact. The term theory is not appropriate for describing scientific models or untested, but intricate hypotheses. The logical positivists thought of scientific theories as deductive theories —that

15344-432: The restriction of classical mechanics to phenomena involving macroscopic length scales and particle speeds much lower than the speed of light. Theory is often distinguished from practice or praxis. The question of whether theoretical models of work are relevant to work itself is of interest to scholars of professions such as medicine, engineering, law, and management. The gap between theory and practice has been framed as

15481-487: The risk to the economy. Four days later, Federal Reserve Bank of Dallas President Richard W. Fisher wrote in advance of a speech to the Conservative Political Action Conference that large banks should be broken up into smaller banks, and both Federal Deposit Insurance and Federal Reserve discount window access should end for large banks. Mervyn King , the governor of the Bank of England during 2003–2013, called for cutting "too big to fail" banks down to size, as

15618-411: The run on the shadow banking system as the "core of what happened" to cause the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible—and they should have responded by extending regulations and

15755-505: The same prudential regulations as depository banks, so that they do not have to keep as high financial reserves relative to their market exposure . Thus they can have a very high level of financial leverage, with a high ratio of debt relative to the liquid assets available to pay immediate claims. High leverage magnifies profits during boom periods and losses during downturns. This high leverage will also not be readily apparent to investors, and shadow institutions may therefore be able to create

15892-438: The service of money.... The characteristic peculiarity of these forms of credit is that they spring up without being subject to any central control, but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided. The full extent of the shadow banking system was not widely recognised until work was published in 2010 by Manmohan Singh and James Aitken of

16029-400: The shadow banking system started to close down in the spring of 2007, with the first failure of auction-rate offerings to attract bids. As excesses associated with the U.S. housing bubble became widely understood and borrower default rates rose, residential mortgage-backed securities (RMBS) deflated. Tranched collateralized debt obligations (CDOs) lost value as default rates increased beyond

16166-543: The shadow banking system will sometimes provide loans to borrowers who might otherwise be refused credit. Money market funds are considered more risk averse than regular banks and thus lack this risk characteristic. Leverage (the means by which banks multiply and spread risk) is considered to be a key risk feature of shadow banks, as well as traditional banks. Money market funds are completely unleveraged and thus do not have this risk characteristic. Shadow banking can threaten financial stability in countries where shadow banking

16303-448: The speaker did not experience or test before. In science, this same concept is referred to as a hypothesis , and the word "hypothetically" is used both inside and outside of science. In its usage outside of science, the word "theory" is very often contrasted to " practice " (from Greek praxis , πρᾶξις) a Greek term for doing , which is opposed to theory. A "classical example" of the distinction between "theoretical" and "practical" uses

16440-466: The term "shadow banking system", dates at least to 1935, when Friedrich Hayek stated: There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do

16577-409: The term "theory" refers to scientific theories , a well-confirmed type of explanation of nature , made in a way consistent with the scientific method , and fulfilling the criteria required by modern science . Such theories are described in such a way that scientific tests should be able to provide empirical support for it, or empirical contradiction (" falsify ") of it. Scientific theories are

16714-416: The term "theory" refers to "a well-substantiated explanation of some aspect of the natural world, based on a body of facts that have been repeatedly confirmed through observation and experiment." Theories must also meet further requirements, such as the ability to make falsifiable predictions with consistent accuracy across a broad area of scientific inquiry, and production of strong evidence in favor of

16851-403: The term in 2010: "A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences." He continued that: "Governments provide support to too-big-to-fail firms in a crisis not out of favoritism or particular concern for

16988-497: The theory from multiple independent sources ( consilience ). The strength of a scientific theory is related to the diversity of phenomena it can explain, which is measured by its ability to make falsifiable predictions with respect to those phenomena. Theories are improved (or replaced by better theories) as more evidence is gathered, so that accuracy in prediction improves over time; this increased accuracy corresponds to an increase in scientific knowledge. Scientists use theories as

17125-557: The theory. In mathematics, the term theory is used differently than its use in science ─ necessarily so, since mathematics contains no explanations of natural phenomena per se , even though it may help provide insight into natural systems or be inspired by them. In the general sense, a mathematical theory is a branch of mathematics devoted to some specific topics or methods, such as set theory , number theory , group theory , probability theory , game theory , control theory , perturbation theory , etc., such as might be appropriate for

17262-657: The true size of the shadow banking system may have been over $ 100 (~$ 131.00 in 2023) trillion in 2012. According to the Financial Stability Board the sector's size grew to $ 100 (~$ 124.00 in 2023) trillion in 2016. The shadow activities of traditional banks grew rapidly in China during 2002-2018, but the United States and Canada still top the Average Shadow Banking Index by far. In 2024, the amount US financial institutions have loaned to shadow banks surpassed

17399-407: The truth of any one of these statements is always relative to the whole theory. Therefore, the same statement may be true with respect to one theory, and not true with respect to another. This is, in ordinary language, where statements such as "He is a terrible person" cannot be judged as true or false without reference to some interpretation of who "He" is and for that matter what a "terrible person"

17536-561: The two policy priorities should be to reduce spillovers from the shadow banking system to the main banking system and to reduce procyclicality and systemic risk within the shadow banking system itself. The G20 leaders meeting in Russia in September 2013, will endorse the new Financial Stability Board (FSB) global regulations for the shadow banking systems which will come into effect by 2015. Many "shadow bank"-like institutions and vehicles have emerged in American and European markets, between

17673-850: The wake of the 2023 banking crisis , the Swiss government facilitated an acquisition of Credit Suisse by UBS to avoid the former's collapse. UBS completed the acquisition in June 2023, thereby making Credit Suisse the first failure of a bank considered "too big to fail" since the Global Financial Crisis . More than fifty notable economists, financial experts, bankers, finance industry groups, and banks themselves have called for breaking up large banks into smaller institutions. (See also Divestment .) Some economists such as Paul Krugman hold that bank crises arise from banks being under regulated rather than their size in itself. Krugman wrote in January 2010 that it

17810-446: The way nature behaves under certain conditions. Theories guide the enterprise of finding facts rather than of reaching goals, and are neutral concerning alternatives among values. A theory can be a body of knowledge , which may or may not be associated with particular explanatory models . To theorize is to develop this body of knowledge. The word theory or "in theory" is sometimes used outside of science to refer to something which

17947-465: The word theory since at least the late 16th century. Modern uses of the word theory derive from the original definition, but have taken on new shades of meaning, still based on the idea of a theory as a thoughtful and rational explanation of the general nature of things. Although it has more mundane meanings in Greek, the word θεωρία apparently developed special uses early in the recorded history of

18084-498: The world, representing 78% of global GDP, up from $ 28 trillion and 68% of global GDP in 2009. Examples of NBFIs include hedge funds , insurance firms , pawn shops , cashier's check issuers, check cashing locations, payday lending , currency exchanges , and microloan organizations . The phrase "shadow banking" is regarded by some as pejorative, and the term " market-based finance " has been proposed as an alternative. Former US Federal Reserve Chair Ben Bernanke provided

18221-575: The years 2000 and 2008, and have come to play an important role in providing credit across the global financial system . In a June 2008 speech, Timothy Geithner , then president and CEO of the Federal Reserve Bank of New York , described the growing importance of what he called the "non-bank financial system": "In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities , tender option bonds and variable rate demand notes , had

18358-539: Was a factor in the subprime mortgage crisis of 2007–2008 and the global recession that followed . Paul McCulley of investment management firm PIMCO coined the term "shadow banking". Shadow banking is sometimes said to include entities such as hedge funds , money market funds , structured investment vehicles (SIV), "credit investment funds, exchange-traded funds , credit hedge funds , private equity funds , securities broker-dealers , credit insurance providers , securitization and finance companies." Still,

18495-481: Was more important to reduce bank risk taking (leverage) than to break them up. Economist Simon Johnson has advocated both increased regulation as well as breaking up the larger banks, not only to protect the financial system but to reduce the political power of the largest banks. On March 6, 2013, United States Attorney General Eric Holder told the Senate Judiciary Committee that the Justice Department faces difficulty charging large banks with crimes because of

18632-541: Was prosecuted (but exonerated after a jury trial) for selling fraudulent mortgages to Fannie Mae . The proposed solutions to the "too big to fail" issue are controversial. Some options include breaking up the banks, introducing regulations to reduce risk, adding higher bank taxes for larger institutions, and increasing monitoring through oversight committees. More than fifty economists, financial experts, bankers, finance industry groups, and banks themselves have called for breaking up large banks into smaller institutions. This

18769-576: Was the first time such a proposal had been made by a high-ranking U.S. banking official or a prominent conservative. Other conservatives including Thomas Hoenig , Ed Prescott , Glenn Hubbard , and David Vitter also advocated breaking up the largest banks, but liberal commentator Matthew Yglesias questioned their motives and the existence of a true bipartisan consensus. In a January 29, 2013, letter to Holder, Senators Sherrod Brown ( D - Ohio ) and Charles Grassley ( R - Iowa ) had criticized this Justice Department policy citing "important questions about

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