The social costs and benefits of TBTF banks; A bounding exercise

While the policy of Too-Big-To-Fail has received wide attention in the literature, there is little agreement regarding economies of scale for financial firms. We take the stand that systemic risk increases when the larger players in the financial sector have a larger share of output. Calculations indicate that the cost to the macro-economy due to increased systemic risk is always much larger than the potential benefit due to
scale economies. When distributional and intergenerational issues are considered, the potential benefits to economies of scale are unlikely to ever exceed the potential costs due to increased risk of a banking crisis.

“This paper is part of the mini conference on "The Future of Large Financial Institutions" at the 2014 fall meetings of the International Atlantic Economic Society.  Sessions on this and related themes are expected to be continued at the spring 2015 meetings in Milan and the fall 2015 meetings in Boston.”