No longer 'too big to fail'?

Bank facade

A subcommittee of the House Financial Services Committee recently held a hearing on the question: Does the Dodd-Frank Act end "too big to fail"?

I’d like to know the answer, both as a taxpayer and as a saver.

As a taxpayer, I was appalled by the 2008-09 transfer of trillions from the Federal Reserve and Treasury into the coffers of big domestic and foreign financial firms -- all because, we were told, their failure would destroy civilization as we know it.

And, as a saver, I’ve been badly burned (see current CD rates) by the seemingly never-ending monetary policy "accommodation" extended by the Fed to prop up markets, primarily because the biggest players couldn’t help themselves and drove the global financial system into a ditch.

One way of answering the subcommittee’s question, I suppose, is to consult the words of Dodd-Frank itself.

Its preamble states that it was enacted, among other things, "to end 'too big to fail,' (and) to protect the American taxpayer by ending bailouts."

Of course, lofty intentions are one thing; actual results are another.

Dodd-Frank addresses TBTF (not a proper acronym, but it’ll do) in several ways.

First, under the aegis of something called FSOC (Financial Stability Oversight Council), it subjects megabank holding companies ($50 billion-plus) and "systemically important" nonbank financial firms to "enhanced supervision and prudential standards" by the Fed.

Second, it requires these behemoths to prepare and file "resolution plans," or so-called "living wills," demonstrating how they could be unwound in the event of financial distress and their potential failure.

Third -- and most importantly -- Dodd-Frank gives the Federal Deposit Insurance Corp. (FDIC) the ability to liquidate big financial firms, pursuant to an "orderly liquidation authority" similar to its existing power to "resolve" failing banks.

Congress put this all into a legislative package that is both complex and subject to differing interpretations.

Regulators are now writing the myriad rules and policies necessary to implement it.

But the FDIC, for one, seems to think it will do the trick.

"I believe that a precondition for a revival of a truly strong banking and financial system in the U.S. is to put an end to too big to fail," former FDIC Chairman Sheila Bair recently testified. "…The Dodd-Frank Act gives regulators the tools to do this."

Is she right?

Coming next: Even with the right "tools," it would be difficult for the FDIC to contain a crisis like that which occurred in 2008.

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