But precisely in the pursuit of this protection, A and D have set up a financing arrangement that serves them well, but that creates a negative spillover onto other market participants, like B and C. It follows that even if policies aimed at curbing too-big-to-fail (TBTF) problems are entirely successful in aligning D’s interests with those of taxpayers, this is not sufficient to deal with fire-sales externalities.
They are a fundamentally different problem, and one that arises even absent any individually systemic institutions or any TBTF issues. 3  An alternative mechanism that works similarly is when the third party is a regulated intermediary and mark-to-market losses reduce its capital ratios, and again force it to involuntarily sell assets in the face of falling prices.