July 23 2015
Rachel DiCarlo Currie
Five years ago, President Obama signed into law the Dodd-Frank Act, a measure aimed at abolishing the de facto policy of letting certain financial institutions become and/or be treated as “too big to fail” (TBTF). But do top-down government programs help prevent TBTF businesses or are they at the root of the problem?
Most analysts agree that TBTF played a significant role in the 2008 financial crisis. Unfortunately, Dodd-Frank did not end TBTF. In fact, it effectively gave the policy an official imprimatur.
Dodd-Frank classified America’s largest bank-holding companies (those with $50 billion or more in assets) as “systemically important financial institutions” (SIFIs), and it empowered federal authorities to give non-bank financial firms the same designation. While SIFIs face tougher regulations than their smaller competitors, there is ample evidence that their TBTF status — now formally recognized by Washington — continues to deliver a major funding advantage.
As for Dodd-Frank’s new resolution authority, which was designed to help the government wind down a failing SIFI and prevent another crisis, it could easily be used as a mechanism for creditor bailouts of the kind we saw in 2008.
If lawmakers are serious about ending TBTF, they must implement reforms that will create a more equitable, balanced, and healthy U.S. financial system.