On March 20, 2013, more than two years after the Dodd-Frank financial reform legislation became law, Federal Reserve chairman Ben Bernanke made it clear that the problem of too-big-to-fail banks had not been solved. “Too Big To Fail” is not solved and gone,” he said in a press conference. “It’s still here.” Apparently providing an orderly liquidation process for bankrupt banks is insufficient in keeping the U.S. economy free of banks of such size that their failure could threaten the economy itself. This point should have been apparent to all in 2010 as Congress was fashioning the Dodd-Frank Act. The fact that it was not points to the power of Wall Street in Washington.
Suggesting that more legislation might be needed, Bernanke said, “Too Big To Fail was a major source of the crisis . . . and we will not have successfully responded to the crisis if we do not address that successfully.” Dodd-Frank had not done the trick. More would be needed to rid the U.S. economy of the threat of banks too big to fail. If holding more capital does not make the big banks safer, “we will have to take additional steps.” This, he said, “is important.”
Because the mammoth size of big banks such as Citibank and Bank of America makes their failure a threat to the viability of the financial system and even the overall economy, it is important to realize that such size is an advantage because the market assumes the U.S. Government would have to bailout such banks if they get into financial trouble taking on too much risk. The sense of invincibility, plus lower borrowing costs, could lead big banks to take bigger risks and thus trigger yet another financial crisis. Bankers at such banks may even feel free to commit fraud, as U.S. Attorney General Eric Holder admitted that large banks are nearly immune from government prosecution for crimes, given the risks to the economy from the failure of a convicted bank. In other words, the risk taken on could easily outstrip even the additional capital requirements in Dodd-Frank.
Source: Mark Gongloff, “Ben Bernanke: ‘I Agree With ElizabethWarren100 Percent’ On Too Big To Fail,” The Huffington Post, March 20, 2013.