Are the Big Banks Still “Too Big to Fail”?

Following the collapse of the real estate and financial markets starting in 2007, Congress and the President enacted a new law entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act”, generally called Dodd-Frank.

The purpose of the Act is to “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes”.  As a part of the Act, eight domestic banks which, due to their size, were deemed to be “systemically important banking institutions” are required to submit “living wills”, ie: plans that show how they would enter bankruptcy without causing widespread damage to the financial industry in the U.S.  In short, these major banks must prove that they are not “too big to fail.”

In these Living Wills, each Bank must each show that they have a combination of capital, liquidity, total loss absorbing capacity (“TLAC”) and other requirements together with credible recovery and resolution plans. However, recently both the Fed and the FDIC have rejected the Living Wills submitted by JPMorgan Chase, Bank of NY Melon, Bank of America, Wells Fargo, and State Street Bank stating that they have failed to prove that their failure would not trigger another financial collapse requiring another government bailout.  As for the remaining designated Banks, the FDIC rejected Goldman Sachs’ plan and the Fed rejected that of Morgan Stanley.  Only Citigroup’s plan was determined to be credible.

As expected, these rejections have unleashed a firestorm of political fighting on both sides of the issue including the statement of Rep. Jeb Hensarling, Chairman of the House Financial Services Committee, that Dodd-Frank and its regulatory burden “impedes economic growth and makes it more difficult for working Americans to achieve financial independence.” Others would say that it is the lack of regulatory control that allowed Banks to create an over-leveraged economy and caused the collapse.

No-one seems interested in reviving the Glass-Steagall Act which was enacted in 1933 following the Great Depression and which many credit with avoiding subsequent economic problems. However, over the decades the protections of Glass-Steagall were gradually whittled away by Congress and Banks were allowed to grow more and more powerful. Finally, in 1999, Congress repealed the Act, a step which many believe opened the door to the financial abuses resulting in the Great Recession from 2007-2009 during which trillions of dollars were lost and millions lost their jobs and homes. The response to this was Dodd-Frank.

So where does this leave the U.S. economy at this point in time? 
The impacted Banks now have until July 2017 to submit updated Living Wills to the Fed and FDIC and prove that their failure would not trigger a new economic collapse. Meanwhile, efforts are underway in Congress to actually repeal Dodd-Frank’s bailout fund and let the failed Banks go bankrupt. And of course, there is the matter of a change of President by the start of next year.
So for now, we can only watch and wait to see if our economy picks up and our confidence in our financial institutions improves.

At BPE Law Group, P.C. we advise business and property owners, real estate agents, and individuals on how to understand and deal with issues as they arise and, where necessary, we  provide legal representation.  If you need our assistance, please contact me at or call our office at (916) 966-2260 to arrange a consultation.

This article is not intended to be legal advice, and should not be taken as legal advice.  Every case requires review of specific facts and history, and a formal agreement for service.  Please feel free to contact us if you need legal advice and are interested in seeing if we can help you.