Final answer:
Regulatory reforms sought to address the 'too-big-to-fail' issue by mandating stress tests, requiring SIFIs to develop living wills, limiting the FDIC’s guarantee powers, and constraining Fed lending to individual banks. However, these measures may not entirely eliminate the risk of government bailouts and raise fairness concerns regarding smaller banks.
Step-by-step explanation:
Regulatory reforms after the 2008-2009 financial crisis aimed to address the "too-big-to-fail" problem with large financial institutions, which implied that certain companies were so large and interconnected that their failure could be catastrophic for the entire financial system, necessitating government bailouts. These reforms included measures such as:
Subjecting large institutions to regular stress tests to evaluate their ability to withstand economic downturns.
Requiring systemically important financial institutions (SIFIs) to create "living wills," detailing how they can be safely dismantled without damaging the financial system.
Limited the Federal Deposit Insurance Corporation’s (FDIC) ability to guarantee losses, reducing the expectation of government bailouts.
Constraining the Federal Reserve's (Fed) lending to individual banks, thus preventing excessive risk-taking with the expectation of Fed support.
However, some critics argue that these measures might not be sufficient because they may not fully prevent moral hazard or address all systemic risks posed by large financial institutions. Moreover, smaller banks received little help, leading to questions about the fairness and effectiveness of these reforms in truly ending "too-big-to-fail" risks.