The trouble is that widespread leverage means that asset price falls detonate the entire system unless capital is backfilled somehow. That was why state credit was so widely extended to banks in trouble: the risk that collapsing bank A is in debt to bank B, which then collapses in turn taking out banks C, D, E, the payments settlement system, and the ability of people to get money out of ATMs.

It's not so much that any one entity is "too big to fail", but all the big entities are too interlinked so they cannot fail separately.