What are the costs and benefits of a too-big-to-fail policy?

Costs:

1. Too big to fail policy increases the risk taking habits of the bank. The bank which otherwise would have been very cautious on its risky activities as it is being scrutinized by the depositors would not worry that much as depositors have less incentive to monitor the banks risk taking activities.

2. It create undesired discrimination against the small banks as small banks does not benefit from the too-big-to-fail policy

Benefits:

1. The investors are assured that the bank will not fail and hence there is less panic to have a bank run kind of situation. This provides a degree of stability to the financial system.