Tackling Too-Big-To Fail

I’ve come around to the view that the Dodd-Frank financial regulation bill was pretty underrated at the time it passed. In particular, the more I read about the events leading up to TARP, the more it becomes clear to me that the dreaded “bailouts” occurred in large part because of a total lack of logistically feasible alternatives. The knowledge wasn’t there to even know how many banks were insolvent or to resolve various claims that people had on them. And as the mystery lawyer behind Economics of Contempt explains in a very informative interview with Mike Konczal a lot of progress has been made on this front in one year of implementation:

EoC: I think this is going well. We basically knew what the rules for the resolution authority were going to look like already — they were going to be very similar to the rules governing FDIC resolutions of commercial banks. The real movement in this space has been in the so-called “resolution plans” that the major banks have to submit (and regularly update). The proposed rule on resolution plans was very strong — it ensures that the FDIC will have all the information it needs when it comes time to actually resolve a major bank. That’s crucial, because a successful resolution of a major bank will have to be planned out in advance and be reasonably comprehensive. The proposed resolution plan rule also allows the FDIC and the Fed to identify any legal or funding structures that would cause problems in a future resolution, and gives the FDIC the authority to force the banks to restructure in a way that would make a future resolution easier.

The FDIC and the Fed were supposed to vote on the final rule for resolution plans earlier this month but ended up pushing the vote to next month. (I think the final rule just wasn’t finished in time, which is understandable.)

I’m not sure I agree that moral hazard around “too big to fail” really was all that causally important to the banking crisis. But it clearly doesn’t help. And whether or not it was the cause of economic problems, it was certainly a moral scandal and introduced an element of political toxicity into all further debates about recovery measures. It also appears to be one on which major unheralded progress is being made. Meanwhile, the right continues to promise to undue it all while simultaneously complaining about bailouts.