The Regional Bond Dealers Association strongly supports comprehensive financial regulatory reform, especially the legislative efforts to end the taxpayer bailout of financial institutions deemed “too big to fail.” However, meaningful regulatory reform must ensure that large institutions receive neither explicit nor implicit protection from the federal government. The financial system cannot operate efficiently if financial institutions and investors assume that the government will protect certain firms from the consequences of poor management. A regulatory structure that provides special treatment for specified large firms signals to the markets that the government will not let such firms fail and merely results in the perpetuation of the too big to fail doctrine. The current practice of treating firms as too big to fail reduces market discipline and encourages excessive risk taking. It also provides an artificial incentive for firms to grow, in order to be perceived as too big to fail. Moreover, treating firms as too big to fail creates an unlevel playing field for any firm without implicit government support.
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