Next video:
Loading the player...

Too big to fail refers to the notion that a business has become so large and ingrained in a nation’s economy that its failure would have catastrophic economic repercussions. When a government bails out a company that’s too big to fail, it intervenes and provides the company with help to survive.

The term goes back decades, but it was prominent during the 2007-2008 financial crisis, when the U.S. government bailed out certain companies and financial institutions that were deemed too big to fail.

If a large company does fail, the companies that rely on it for their business may collapse as well, costing employees their jobs and leading to a cascade of negative effects that can hurt an economy. Governments weigh the cost of a bailout versus the cost of a company failing, and bailouts are sometimes the most cost-effective solution.

While bailouts can avert an economic collapse, there are opponents who argue they might lead to unnecessary risk taking, and that no company should be allowed to become too big to fail; or in the event such a large company DOES start to go under, the government should not intervene.

Related Articles
  1. Insights

    Top 6 U.S. Government Financial Bailouts

    U.S. bailouts date all the way back to 1792. Learn how the biggest ones affected the economy.
  2. Investing

    Fed Announces New Rules for Banks "Too Big To Fail" (BAC, C)

    On Monday, the Fed announced new regulations to better align its policy with the requirements of the 2010 Dodd-Frank Act.
  3. Insights

    The New Global Banking Regulations To Avert Future Crisis

    These are the types of policies that are being developed to minimize the risks posed to the global financial system by banks which are too big to fail.
  4. Small Business

    The 4 Most Common Reasons a Small Business Fails

    Discover the most common reasons small businesses fail, including capital formation, management concerns, planning issues and marketing missteps.
  5. Investing

    The Government And Risk: A Love-Hate Relationship

    Though the U.S. government can help its citizens by subsidizing risky loans, the costs always come back to the taxpayers.
  6. Small Business

    A New Plan To Prevent Future Bailouts

    This new and innovative plan by the FDIC could help the government avoid the next bailout.
  7. Small Business

    Top 6 Reasons New Businesses Fail

    Running your own business may be the American Dream, but it's become a nightmare for many entrepreneurs. Learn how to avoid the most common factors leading to bankrupt businesses.
  8. Investing

    Can Good News Be A Signal To Sell?

    Sometimes positive announcements can mean bad news for a stock. Find out why.
  9. Investing

    Wal-Mart Faces a Major 2016 Challenge (WMT, AMZN)

    Bearish signals suggest Wal-Mart's recovery effort will fail and yield a test of multiyear support in the 50s.
  10. Investing

    New Lows for Deutsche Bank on No Bailout Promise (DB)

    The German bank won’t get bailed out by the German government, according to an in-country report.
Hot Definitions
  1. IRR Rule

    A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of ...
  2. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  3. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  4. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  5. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  6. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
Trading Center