Fact and Fiction Behind Too Big to Fail
TBTF bank CEOs were quick to support the Dodd-Frank “resolution authority”, stating that banks should be allowed to fail. This was a game. Dodd-Frank clarified and strengthened the ability of the government to bail out failing banks.
When systemic banks fail, the whole system goes down, as we saw in 2008.
If the intent is to prevent further government bailouts, wouldn’t the best tactics be focused on minimizing the creation of systemic risk? Resolution authority only deals with resolving failed banks — after they have failed. It does nothing to reduce systemic risk. TBTF bank CEOs can continue to take excessive risks and earn their high compensation amounts, knowing that while they may be removed after their institutions have collapsed, the government will be able to bail out those institution with stronger legal authority. Taxpayers still are left holding the bag.
Not too little, but certainly too late.