Too Big To Fail Banks: Where Are They Now?

Every so often, a single phrase captures the anxiety of an era. In 2008, as global markets teetered on the edge of collapse, “too big to fail” became shorthand for a stark new reality: some banks had grown so large and were so deeply integrated into the world’s financial system that their downfall could pull the entire economy down with them. The result was unprecedented bailouts, controversial interventions, and a fundamental reevaluation of how the country’s largest banks had accumulated so much risk in their portfolios. The 2008 crisis forced a reckoning: could the world afford to let banks become so large and essential that failure was not an option?

The financial and economic landscape has changed—but less dramatically than many hoped after international agreements like the Basel Accords and changes in U.S. law. Today’s banking behemoths are, by several measures, even larger than before the crisis that nearly destroyed them.

The 2008 Financial Crisis and Government Intervention

The 2008 financial crisis was triggered by a combination of risky mortgage lending, the proliferation of complex financial products based on that lending, and a widespread loss of confidence in the financial system. As the housing bubble burst, major institutions faced mounting losses, leading to a cascade of failures and near-collapses among some of the world’s largest banks and investment firms.

Lehman Brothers went first. Despite efforts by the U.S. Federal Reserve and the U.S. Securities and Exchange Commission to monitor and stabilize Lehman’s liquidity, the firm couldn’t raise enough capital for a private-sector rescue. With no authority to provide the capital or guarantees, U.S. officials watched as Lehman filed for bankruptcy in September 2008. That sent shockwaves through global markets, triggering a run on money market funds and freezing short-term credit markets.

In response, the U.S. government intervened to stabilize other key institutions and restore confidence. Authorities used several mechanisms:

• Capital injections: Congress authorized the Troubled Asset Relief Program (TARP) to provide up to $700 billion (later reduced to $475 billion) to buy distressed assets and inject capital directly into banks and other financial institutions. This helped shore up balance sheets and prevent further failures.
• Liquidity support: The Fed established emergency lending facilities to provide short-term funding to banks, securities dealers, and money market funds, aiming to maintain credit flows and prevent a broader market collapse.
• Guarantees: The Treasury temporarily guaranteed the $1.00 share price of over $3 trillion in money market fund shares to stop investor runs and support the short-term funding markets.
• Support for key firms: In addition to TARP, the government helped along the sale or restructuring of failing institutions, providing targeted support to systemically important firms, such as AIG, to prevent another chaotic collapse.

The Fate of Major Banks Receiving Bailouts

Bear Stearns and JPMorgan Chase

In March 2008, Bear Stearns faced a sudden and severe liquidity crisis. Its contingency planning had not accounted for the abrupt loss of access to secured funding, leaving it unable to meet repayment demands. The Fed, seeing that Bear Stearns’ failure could disrupt key funding and derivatives markets and potentially trigger runs on other financial firms, facilitated its acquisition by JPMorgan Chase.

The deal was structured as a stock-for-stock exchange, with JPMorgan Chase acquiring Bear Stearns to prevent further destabilization of the financial system. Since the acquisition, JPMorgan Chase has grown into the world’s largest financial institution.

American International Group (AIG)

AIG, once the world’s largest insurer, was at the center of the 2008 crisis because of its exposure to mortgage-related securities and credit default swaps. The U.S. government provided about $182 billion in support—$70 billion from the Treasury through the TARP and $112 billion from the Federal Reserve Bank of New York.

Over the following years, AIG repaid all government assistance, and the Treasury and Federal Reserve made a combined profit of $22.7 billion on their investment.

Morgan Stanley and Goldman Sachs

As the crisis deepened, Morgan Stanley and Goldman Sachs both faced severe funding pressures. In September 2008, the Federal Reserve approved their applications to become bank holding companies, granting them access to emergency lending facilities and stabilizing their funding. This transition allowed both firms to diversify their business models and access more stable sources of funding, such as customer deposits.

Today, Morgan Stanley is among the largest U.S. depository institutional holding companies, with a strong capital position. Goldman Sachs has reorganized its business, expanding into commercial banking.

Bank of America

During the crisis, Bank of America had a key role in stabilizing the financial sector by acquiring struggling institutions, most notably Merrill Lynch in late 2008, a move that significantly increased Bank of America’s size and scope. The integration of Merrill Lynch’s investment banking and wealth management businesses helped Bank of America diversify its revenue streams and strengthen its market position.

Bank of America remains one of the largest and most profitable banks in the world, about five times the size it was during the 2008 crisis in terms of market capitalization.

Regulatory Changes and Current Landscape

In response to the 2008 financial crisis, governments worldwide put in place sweeping regulatory reforms to address the risks posed by “too big to fail” institutions. In the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 became the centerpiece of these reforms, introducing improved prudential standards for large banking organizations and nonbank financial companies designated as systemically important.

Dodd-Frank established a tiered approach to regulation, with stricter rules for bigger, more important institutions. Key provisions included the following:

• Requiring banks to keep more money in reserve to cover potential losses (like increasing your emergency savings fund)
• Creating “living wills” that force banks with over $50 billion in assets to have detailed plans for how they could shut down without causing economic chaos.
• Giving regulators special powers to step in and close failing financial giants in an orderly way outside of normal bankruptcy courts.

Globally, the Basel Accords have established a comprehensive international framework for banking regulation. The final phase, called “Basel III Endgame,” has been rolling out this decade, with banks required to fully comply by July 2028 within the regions that sign on to the changes.

Notably, the U.S. has not fully signed on to Basel III. Amid a lobbying blitz against the stricter regulations, Fed Reserve Chair Jerome Powell testified to Congress in March 2024 that he expects “broad and material changes to the proposal” to create a final product that has “broad support, both at the Fed and in the broader world.” Since then, the second Trump administration has cast further doubt on whether any further reforms will be implemented.

Bottom Line

Despite new laws and regulations, the “too big to fail” problem is still with us. Many major U.S. banks—JPMorgan Chase, Bank of America, Goldman Sachs, and Morgan Stanley—are larger today than they were before the crisis, partly because of mergers that occurred during the crisis and subsequent growth.

Critics worry that these banks still benefit from the perception that they will be rescued if they get into trouble, potentially encouraging them to take excessive risks. The fact that the Basel Accords focus so much on “systemically important banks” implies that some institutions are still too big to fail without grave economic consequences for us all.