Too Big and Unable to Fail

47 Pages Posted: 16 Sep 2016 Last revised: 13 Apr 2018

See all articles by Stephen J. Lubben

Stephen J. Lubben

Seton Hall Law School

Arthur E. Wilmarth

George Washington University Law School

Date Written: 2016


Financial regulation after the Dodd-Frank Act has produced a blizzard of acronyms, many of which revolve around the “too big to fail” (TBTF) problem. OLA, OLF, SPOE, and TLAC are new regulatory tools that seek to build a new regime for resolving failures of systemically important financial institutions (SIFIs). The explicit goal of this new regime is to enable a SIFI to fail, just like United Airlines or Blockbuster Video, without requiring a government bailout. In this article, we express significant doubts about the new regime’s ability to work as advertised. The “single point of entry” (SPOE) resolution strategy, which focuses all resolution efforts on a SIFI’s parent holding company, is a strategy devised for a very stylized, even hypothetical sort of failure that does not threaten the stability of the financial system. SPOE is unlikely to work as intended during a future global crisis that involves multiple failing SIFIs operating thousands of subsidiaries across dozens of national boundaries. The Federal Reserve’s “total loss-absorbing capacity” (TLAC) proposal is closely tied to SPOE. It would require parent holding companies of SIFIs to issue large amounts of debt securities that can be written off or converted into equity in a resolution proceeding. In our view, TLAC debt will create a new, more opaque way to impose the costs of financial distress in SIFIs on ordinary citizens, because most TLAC debtholders are likely to be retail investors in brokerage accounts, mutual funds, and pension funds.

The most fundamental shortcoming of SPOE and TLAC, as currently proposed, is that both policies would entrench our perverse system for regulating SIFIs. Our current regulatory system enables SIFIs and their Wall Street creditors to reap massive benefits from the TBTF subsidy while imposing the costs of that subsidy on ordinary citizens. We recognize that a new and improved version of Dodd-Frank is not likely to emerge from Congress in the near term. However, regulators should use their existing powers to shrink the TBTF subsidy by forcing SIFIs and their Wall Street creditors to internalize at least some of the costs of the enormous risks they create. The final part of our article proposes reforms that would help to achieve that goal.

Keywords: Chapter 14, Dodd-Frank Act, Financial Conglomerates, Orderly Liquidation Authority, Single Point of Entry, Systemically Important Financial Institutions, Total Loss-Absorbing Capacity, Too Big to Fail, Universal Banks

JEL Classification: E44, E53, E58, F30, G15, G18, G20, G21, G28, G33, G38, K20, K22, K23, N20

Suggested Citation

Lubben, Stephen J. and Wilmarth, Arthur E., Too Big and Unable to Fail (2016). Arthur E. Wilmarth, Jr. and Stephen J. Lubben, Too Big and Unable to Fail, 69 FLA. L. REV. 1205 (2017)., GWU Law School Public Law Research Paper No. 2016-44, GWU Legal Studies Research Paper No. 2016-44, Seton Hall Public Law Research Paper, Available at SSRN:

Stephen J. Lubben

Seton Hall Law School ( email )

One Newark Center
Newark, NJ 07102-5210
United States
973-642-8857 (Phone)

Arthur E. Wilmarth (Contact Author)

George Washington University Law School ( email )

2000 H Street, N.W.
Washington, DC 20052
United States

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