An Orderly Liquidation Authority is Not the Solution to Too-Big-To-Fail

Abstract

Although the Dodd-Frank Consumer Protection and Wall Street Reform Act of 2010 (“Dodd-Frank”) is an improvement over the financial regulatory system that preceded it, it will not abolish “too big to fail” because the major banks and other financial institutions in the capital markets are too big bigger now than they were before the meltdown of 2008 and too complicated. Furthermore, these financial institutions have grown to their current size and shape because they were permitted, and even encouraged, to do so by the very same financial agencies that are now supposed to do a better job of regulating them. These regulators did so for a variety of reasons that have not been altered by Dodd-Frank.

This Article will set forth the provisions of Dodd-Frank that deal with the mechanisms for closing banks and providing liquidity in a financial crisis, and suggest that, although the orderly liquidation procedures of Dodd-Frank might make the resolution of a failed mega-bank less chaotic, these procedures will not prevent any financial institutions from being too big to fail. Also, this Article will discuss the dynamics of the creation of the mega-banks, and how they grew, through the destruction of the statutory geographical restrictions on banking and the separation of commercial and investment banking through interpretations by the banking regulators that were first upheld by the courts, and much later endorsed by Congress. Finally, this Article will discuss various mechanisms that have been proposed for dealing with the size and complexity of the mega-banks.

Keywords: Too-Big-To-Fail, Banks, Bank mergers, holding companies, Federal Reserve Board, Bank of America, Citigroup, JP Morgan Chase, Glass Steagall Act