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What is too connected to fail?

Too connected to fail

This is a phrase that refers to a bank that’s so connected to other financial institutions that its failure would have massive repercussions for the entire system, potentially sparking a financial crisis like the one we saw in 2008.

Where have you heard about too connected to fail?

You’re probably familiar with the phrase “too big to fail”. But what’s really important is how connected a bank is to other banks, not how big it is. Too connected to fail takes into account the high connectivity of banks rather than the size of one particular institution.

What you need to know about too connected to fail.

The financial system is acutely interconnected, which makes determining which bank is too connected to fail very difficult. You don’t have easily measurable metrics like value of assets to go on. Banks borrow from and lend to one another, so a small number of institutions can become hugely influential over time.

Economists have devised a method called DebtRank, based on Google’s PageRank algorithm, to analyse a vast amount of financial data to try to figure out which banks are the most connected and, therefore, the most dangerous.

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