The 2010 Dodd-Frank Act, which included the orderly liquidation living wills requirement, was meant to prevent future rescues of systemically important financial institutions. But the idea that current regulations are capable of solving the too-big-to-fail problem was challenged by the recent regulatory rejection of 11 banks' living wills. Some argue that living wills are a work-in-progress that will improve over time. However, the truth is that living wills are a myth meant to calm the populace. It is impossible to neatly unwind a failed SIFI, since the failure of such a large institution will necessarily cause unacceptable collateral damage.
The most likely course of action is that regulators will maintain the status quo and change nothing of substance, relying on cosmetic fixes to give voters a false sense of security. Some free market enthusiasts might argue that the status quo isn't so bad, so long as customers and not regulators decide how big banks should be. But the SIFI market is anything but free. The big bank model failed in late 2008; in a free market, these banks would have ceased to exist. They survived because they are the creations of the government, not the free market. Exempt from market discipline, they represent crony capitalism at its worst.
This post was published at American Banker
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