What is the concept of “too big to fail” in finance?

The concept of “too big to fail” refers to financial institutions that are so large and interconnected with the economy that their failure would cause significant disruption. These institutions, such as major banks, are often deemed essential to the stability of the financial system. As a result, governments may intervene to prevent their collapse, such as by providing bailouts or other forms of assistance. While this policy aims to avoid systemic collapse, it can also lead to moral hazard, where these institutions take excessive risks, knowing they may be rescued if things go wrong. The term has been particularly prominent following the 2008 financial crisis.