Financial Regulation Reform and Too Big to Fail

Brett McDonnell

University of Minnesota Law School

January 17, 2012

American University Business Law Review, Forthcoming
Minnesota Legal Studies Research Paper No. 12-08

Perhaps the leading critique of the Dodd-Frank Act is that it does too little to address the problem of too big to fail (“TBTF”) financial institutions. The critique of TBTF institutions has two main components. The economic argument focuses on a major moral hazard problem. The political argument focuses on the political clout of TBTF institutions. There are important truths in both the economic and the political argument against TBTF institutions. However, there are also important limits to the truth of both arguments. I believe the limits are more central than the truths, and that if anything Dodd-Frank has gone too far in focusing on TBTF institutions. This paper first explores the truths and limits of the economic argument, and then does the same for the political argument. It then lays out a map for my own preferred approach to the TBTF problem. In the short run, we need relatively modest but firm regulation. Dodd-Frank looks pretty good in many ways, but still needs some important fixes. The longer run is more daunting: we need to find ways to develop alternative financial and other institutions that are smaller and more focused on community and other stakeholder interests.

Number of Pages in PDF File: 17

Keywords: too big to fail, financial regulation, Dodd-Frank Act

JEL Classification: G28, G38, K20, L51

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Date posted: January 18, 2012  

Suggested Citation

McDonnell, Brett, Financial Regulation Reform and Too Big to Fail (January 17, 2012). American University Business Law Review, Forthcoming; Minnesota Legal Studies Research Paper No. 12-08. Available at SSRN: http://ssrn.com/abstract=1986923

Contact Information

Brett H. McDonnell (Contact Author)
University of Minnesota Law School ( email )
229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-1373 (Phone)

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