The European Union Should Start a Debate on Too-Big-To-Fail - by Morris Goldstein and Nicolas Veron

The existence of too-big-to-fail financial institutions represents a three-fold policy challenge.

• First, such institutions exacerbate systemic risk by blunting incentives to manage risks prudently and by creating a massive contingent liability for governments that, in extreme cases, can threaten the latter's own debt sustainability; Iceland in 2008–09 and Ireland in 2010–11 serve as dramatic, recent cases in point.
  
  
• Second, too-big-to-fail financial institutions distort competition. The 50 largest banks in 2009 benefitted from an average three-notch advantage in their credit ratings (Bank for International Settlements 2010)—an advantage presumably related in part to the higher likelihood of official support at times of crisis.
  
  
• And third, the favored treatment of too-big-to-fail institutions—often summarized as "socialization of losses and privatization of gains"—lowers public trust in the fairness of the system (Johnson 2009).
  

For more: Op-ed from Peterson Institute for International Economics: The European Union Should Start a Debate on Too-Big-To-Fail