Wait on TBTF Reform? That's Tempting Fate

I wholeheartedly agree that tough questions about the nation's "too big to fail" problem need to be discussed. This is a complex issue that affects not just Washington policymakers and Wall Street money-movers, but our entire financial system and communities nationwide. Therefore, we as a nation must discuss whether the costs of "too big to fail" are worth bearing and what we should do about them if they are not.

Do the systemic risks that megabanks pose merit market distortions funded by taxpayers? Should the government safety net apply to massive financial firms that collectively hold tens of thousands of nonbank "shadow" subsidiaries? Will splitting them up restore market discipline, prevent future crises and reduce systemwide regulatory burdens? We have to find answers to these and other questions.

But what we cannot do is continue to play the waiting game. An honest debate over our "too big to fail" problem and a sound policy response are incompatible with a wait-and-see approach to the laws already on the books. We have been down that road before. As a community bank president at the time, I remember it well. I lived it. I heard the debate. I was there.

It has been nearly a quarter century since Congress was supposed to have ended "too big to fail" with the Federal Deposit Insurance Corp. Improvement Act of 1991. Opponents of FDICIA wrote at the time that "too-big-to-fail" promotes a healthy banking system that stimulates economic growth and that "stepping back from the doctrine creates liquidity crises, bank failures and no-growth economics."

Nevertheless, as American Banker Editor at Large Barbara Rehm wrote just days after the signing of FDICIA, our "too big to fail" problem would live on despite the law. And she was right. In the 22 years since it passed, we have seen the continued explosive growth of systemically risky financial firms, further consolidation of the banking industry and another devastating round of calamity and government intervention.

While regulators are implementing new Dodd-Frank Act tools to give them a better grip on the problem, such as stricter prudential standards and the FDIC's orderly liquidation authority, there is no indication that "too big to fail" has been fundamentally resolved. In fact, Wall Street financial firms have only grown larger since the financial crisis they started, thanks in no small part to their perceived government guarantee against failure.

Our "too big to fail" problem didn't begin with the Bear Stearns rescue of March 2008 and didn't end in July 2010 with the passage of Dodd-Frank. As long as we continue to support banks of such magnitude and interconnectedness, there is not a politician born who would allow them to fail, because they would not only bring down their "too big to fail" brethren, they would also crush the entire financial system with their sheer weight. This includes our nation's nearly 7,000 community banks.

So, yes, I agree that we as a nation must have a positive debate over what to do about "too big to be allowed to fail" and the massive financial firms that benefit from it. But we cannot wait until it is too late. We must remember our history of "too big to fail" because we cannot afford to repeat it.

Camden R. Fine is president and CEO of the Independent Community Bankers of America.