Unless countervailing steps are taken, the belief by market participants that a particular firm is too big to fail, and that shareholders and creditors of the firm may be partially or fully protected from the consequences of a failure, has many undesirable effects.
It materially weakens the incentive of shareholders and creditors of the firm to restrain the firm's risk-taking, provides incentives for financial firms to become very large in order to be perceived as too big to fail, and creates an unlevel competitive playing field with smaller firms that may not be regarded as having implicit government support.