Believing that the government will, for this reason, prevent such an intermediary from becoming insolvent, market actors may extend credit as if a guarantee similar to deposit insurance were in place. Thus the nature and extent of the firm’s liabilities, taken as a whole, may warrant capital regulation to offset an implicit TBTF subsidy.
Even if the distinct problem of TBTF could be countered through other means, such as a credible bankruptcy or resolution option, the failure of a financial intermediary with systemically significant liabilities raises the prospect of imposing very large negative externalities on the financial system.