too big to fail theory definition with example image

Too big to fail theory : Definition with example !

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It is said that the more you learn, the more you earnLearning is always enhance your earning. So, in order to boost your knowledge QuitOffer has brought you a new topic and that is “Too big to fail theory”.

“Too Big To Fail” to understand this phrase let’s take an example ›››

Suppose you are the owner of a textile company. All is going properly but suddenly you come to know that a huge scam was held in your company.

You call a meeting and announce to find out the convict. After some time, your sources inform you that the cause of fraud held in the company was the chief executive officer(CEO) and nobody else.

And as you promised to find out the convict and take action accordingly. Now you have to go through it.

But the problem encounters in your way is if you take any action against the CEO then this incidence will draw a negative image of the company in shareholders’ mind which in turns degrade the valuation of the company dramatically.

Owing to this you decided to cover up the incidence and support the CEO to overcome the situation. And this is the concept of “Too Big To Fail.”

Let’s dig deeper to understand “Too big to fail” theory more clearly.

“Too Big To Fail” is the theory which states that government intervene and supports financially and keeps it policies flexible in case of any failure or fraudulent towards those companies or organizations which plays an important role to maintain the economy of the country and their failures cause a massive amount of loss to the economy.

“Too Big To Fail” theory is introduced by U.S. Congressman Stewart McKinney in 1984.

Usually “Too Big To Fail” concept is concerned with the DSIBs(Domestic Systematically Important Bank) such as SBI, ICICI, and HDFC banks.

Banks become systemically important due to their size, cross-jurisdictional activities, complexity and lack of substitute and interconnection. Banks whose assets exceed 2% of GDP are considered part of this group.

On DSIBs(Domestic Systematically Important Bank) any countries economy depends to a large extent.

If the banks are involved in any kind of fraud or scam and confront any sort of failure, then the government intervenes in that case and supports the bank to resolves the problem.

Some major scams in India are ›››

 Vijay Malya scam.

 Nirav Modi scam.

 R P info system scam.

 Kanishka Gold pvt. scam.

 Rotomac scam.

The Nirav Modi scam of Rs. 11,400 crore is being called the biggest scam in the banking sector of India.

Also, the second biggest scam in the Indian banking system is Vijay Malya scam in which he borrowed Rs. 9,432 crore from 13 banks.

SBI was the biggest lender among all the 13 banks.

And if it comes to the SBI then SBI has its own contribution to make the Indian economy strong. And that segregates it from others.

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Let’s take a look over the contribution of State Bank Of India(SBI) ›››

 SBI has around 22,500 branches and 58,000 ATMs.

 The total asset value of SBI is Rs. 37 Trillion

 There are more than 50 crores Indian Customer, who have put their faith in SBI by saving money in it.

So, in case of any failure within the banking system of SBI, the government is compelled to help the bank financially and make its policy flexible for SBI. And if it takes any action against the SBI, it will slow down the economy.

So this is what happens if “TOO BIG TO FAIL INSTITUTIONS FAIL.”

Usually when banks do any kind of fraud or encounter any sort of fraud by others. It impacts the economy to a great extent. As the consequences of the fraud concerned with the banking system, NPA’s affect a lot.

(NPA is Non-Performing Asset that means when there is no more interest or principal amount a bank gets for the loans it has given.)

 As the NPA of the banks increase, it will draw a negative image in the mind of shareholders. And that leads to slow down the market.

 Also, the shareholders will lose a lot of money as banks’ NPA rises.

 As the banks’ NPA rises the management of the banking system will fight with the fund to meet out their liabilities which in turn increases the interest rate and that slows down the growth rate of the economy.

 Inflation gets high when the banks’ NPA rises.

Global TBTF institutions ›››

There are also some global “Too Big To Fail” banks, thier failures can cause massive disturbance in global economy.

Some global systemically important financial institutions (SIFIs) are ›››

 Mizuho

 Bank of China

 BNP Paribas

 Deutsche Bank

 Credit Suisse

Conclusion

A “Too Big To Fail” organization is an organization or a business whose size, lack of substitute, interconnections, and its complexity strengthen the economy of a country and if the organization goes into some critical situation, the economy of a country encounters some adverse consequences. And the government is responsible to a large extent to provide strong support to the organization.

So, QuitOffer is expecting that you got the right interpretation of what the “Too Big To Fail” theory is. Tell us your reviews about this article. And if you like this article then share this article on social media.

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