Has Dodd-Frank Solved “Too Big To Fail”? Depends On Whom You Ask…

Has the Dodd-Frank Act solved the “Too Big To Fail” problem?

Senators Sherrod Brown and David Vitter would say it has not. After all, they recently introduced the Terminating Bailouts for Taxpayer Fairness Act, which would impose significantly higher capital reserve requirements on the country’s largest financial institutions.

But not everyone shares that view. For example:

Banking attorneys at Shearman & Sterling:

“… the [Dodd-Frank Act (DFA)] includes significant new regulatory tools to address [Too Big To Fail], and most of these tools are not yet fully developed. Before new reforms are introduced, policymakers should take stock of the reforms in the DFA, not even three years old, and wait until these reforms are implemented by regulators and absorbed and understood by the market before initiating further action.”

Read on:

Randall Guynn, Davis Polk (via Bloomberg Law):

“The FDIC needs to issue a policy statement really spelling out how it’s going to use its authority. It’s nice to have speeches, it’s nice to have editorials, but they need to have something that’s more binding on them so that the market can rely on it. The second thing is the Federal Reserve has been working on, and is likely to propose by the end of the summer they’ve said, some sort of requirement of minimum loss absorbing resources that would be a combination of common equity, preferred equity, subordinated debt, and long-term senior debt.”


Rodge Cohen, Sullivan & Cromwell (via Bloomberg Law):

“I come down very much on the side that Dodd-Frank did an excellent job in fixing Too Big To Fail. […] One, would there be a rescue of a large bank that failed, or a large financial institution? The answer is clearly there could not be. Dodd-Frank mandates are very clear: shareholders are wiped out, management is replaced, debt holders suffer any losses, and taxpayers are fully protected. In addition the rescue mechanisms which were used by the Federal Reserve in 2008, have been basically emasculated. Now the second aspect of Too Big To Fail is whether the resolution regime actually works. And I think if you look at it fair-mindedly, you will conclude that there is an effective resolution for large financial institutions which is now in place, largely through the bridge company mechanism.”


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