Abstract: In 2013, media reports sent shockwaves across financial markets by

estimating that the value of the combined financial advantages and subsidies for

the six biggest U.S. banks since the start of 2009 was at least $102 billion. Follow-

up reports estimated that the profits of two of America’s largest banks

would have been negative if not for implicit and explicit government subsidies.

The most significant implicit subsidy stems from market perception that the government

will not allow the biggest banks to fail—that they are “too-big-to-fail”

(TBTF)—enabling them to borrow at lower interest rates. This article focuses

on two main things. First, it explores the TBTF subsidies and their unintended

consequences. Specifically, the article examines whether TBTF subsidies exist,

and reviews the different estimates of the arguable subsidies. The article describes

why it is difficult to measure the subsidies given the lack of any formal

or transparent data, and discusses the perverse effects and incentives that result

from the subsidies. Second, the article examines the various proposals that have

been suggested to address the TBTF problem, and suggests a new user-fee

framework that could be useful in addressing the issue and used together with

other approaches.

The article’s contributions are three-fold. First, it provides a theoretical

framework for understanding how government subsidies have worked in the

past. Second, the article applies that framework to demonstrate that the current

body of work on the issue is incomplete because it under-theorizes the TBTF

subsidies’ impact on the economy and politics. Finally, the analysis in this article

usefully supplements the existing legal writing on regulation of banks. As a

first step, the article explains the problems created by the subsidies, and suggests

that policymakers and market participants should be more transparent

about the subsidies, especially since taxpayers do not have standing to challenge

such subsidies. As a second step, the article reviews the advantages and the

shortcomings of the suggested solutions to the TBTF problem and suggests using

user-fees to help minimize the impact of future financial, social and political