Too big for a will?

08/06/2014 6:12 PM

08/06/2014 8:11 PM

From an editorial Wednesday on Bloomberg View:

The Federal Reserve and the Federal Deposit Insurance Corp. just confirmed what most people already knew: The largest banks are far too complex and opaque for their own good, let alone for the good of the broader economy.

This isn’t the first time they’ve said it. But it’s the first time they’ve sounded so impatient.

Every year, under the Dodd-Frank Act, the banks are supposed to submit “living wills” in which they describe how they could be dismantled through bankruptcy without causing panic or tanking the economy. Three years in a row, starting in 2012, the banks have submitted documents that fell short of that goal – more or less saying that they are fine as they are.

It’s no surprise that big banks find the exercise difficult. With thousands of legal entities spread around the world, their operations test human understanding, let alone effective management. The banks’ scale and interconnectedness explain why governments feel compelled to rescue them when they get into trouble, rather than face the potentially disastrous consequences of standing aside.

If used to the full extent allowed by the Dodd-Frank Act, the living will is a powerful regulatory tool. If banks can’t make a convincing case they are no longer too big to fail, regulators can require them to raise more loss-absorbing capital, for instance, or even divide them into smaller, more manageable pieces.

The Fed and the FDIC have given the banks until July 2015 to show “significant progress” on their living wills. That progress should be for all to see.

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