I've purposely walked a fine line in the debate over "too big to fail," challenging both sides without taking one.

My April 26 column outlined the hurdles to breaking up the biggest banks and concluded that the idea sounds a whole lot better in theory than in practice.

Barbara A. Rehm

But then an appalling string of blowups at the world's largest banks gave a surge of momentum to breakup backers. So in last week's column I argued the industry can't rig interest rates, abet money launderers, lose nearly $6 billion on a greedy trade, discriminate against homebuyers and use misleading marketing and not expect Washington to notice.

The column was a warning to the industry to get its act together before government has no other choice but to wield a policy machete.

Now I am wondering if what this debate needs is a clearer focus on the endgame.

What's the policy goal here? It's not an end to big-bank failures. It is an end to bailouts.

If a $2 trillion-asset financial firm can play by the rules, serve its customers and keep shareholders satisfied, great. Policymakers will happily stand aside.

But if the financial system needs public money, that's a problem. A big one.

So what's the best way to accomplish this no-more-bailouts goal?

Easy fixes don't work.

It's not a size limit. How big is too big? Besides, we already have 10% caps on an institution's share of the national deposit market or the industry's total assets.

And it's clear from the 2008 crisis that simply splitting commercial from investment banking is not a panacea either.

Look at the list of companies the crisis hit: Bear Stearns; Fannie Mae and Freddie Mac; Merrill Lynch; Lehman Brothers; Reserve Primary Fund; AIG; Washington Mutual; Wachovia.

None of them were rocked because Gramm-Leach-Bliley undid the Glass-Steagall Act. They weren't huge and they weren't sunk by some unholy mingling of banking and trading.

Those companies crumbled for two reasons: lousy management and lax oversight. Those are the problems we need to focus on.

And whether anyone wants to admit it or not, those are exactly the problems the Dodd-Frank Act went after.

The law Congress passed in response to the crisis has plenty of critics, but its reforms could prevent future bailouts through stronger oversight and tougher restrictions on the largest banks. It also eliminated or restricted many of the tools regulators have used to prop up or bail out banks in the past.

Dodd-Frank "has changed, in powerful and palpable ways, bank regulation in the United States," says Wayne Abernathy, executive vice president for financial institutions policy at the American Bankers Association.

Dodd-Frank equips the regulators with everything they need to keep a tight rein on the largest banks, including the right to take over and liquidate any systemically important company, impose losses on shareholders and creditors and fire management.

All of these companies must submit and continually update living wills that lay out for regulators a resolution road map should they stumble. They are subject to harsh and repeated stress tests to gauge how well they would withstand economic shocks. They face higher and stricter capital and liquidity standards as well as limits on leverage and counterparty risk. New rules are being written to overhaul risk management practices at the megabanks.

Any company that chooses to grow will face even harsher constraints and higher capital requirements.

Some of you are no doubt shaking your heads, thinking the regulators will never have the guts to use these tools. And history supports that skepticism. The best example is Prompt Corrective Action, the provision in the FDIC Improvement Act of 1991 that was supposed to head off another S&L crisis by imposing increasingly stiff sanctions on a bank as its capital declined. But regulators didn't require weak assets to be written down, so capital didn't fall and sanctions didn't follow.

A much older law, the Bank Holding Company Act, gave the Federal Reserve Board the power to force divestitures if it thought an affiliate posed a threat to a bank's health. That provision has never been used.

Even when examiners have found problems, too often follow-up is lacking. Federal regulators have consistently failed to demand improvements and force accountability. The Libor mess is Exhibit A in regulatory complicity.

But this time can be different. It has to be.

Abernathy, who joined the ABA after working on the Hill and at the Treasury Department, says he expects examiners to fully embrace the new authorities provided by Dodd-Frank.

"The regulators understand that if and when there is a problem, they've got nowhere to run," he says. "They are as much on the line as the institution."

I agree, and so do many former regulators I put the question to. There is just too much pressure on the regulators to enforce the letter and spirit of Dodd-Frank.

Congress has already held numerous hearings and the regulators seem to have gotten the message. The days of letting a big bank fix a problem on its own schedule are over. When problems surface, regulators will demand comprehensive and quick action. They'll levy fines and do extensive follow-up.

And investors are hardly standing idly by.

The two banking giants that required the most government aid — Citigroup and Bank of America — are under the gun from shareholders to boost returns. As a result of demands from both examiners and investors, they are voluntarily slimming down.

Clearly, the "too big to fail" debate is shifting from one about size (let's make the banks smaller) to one about complexity (let's make the banks simpler and safer).

Every large bank's board of directors needs to recognize that, and honestly assess how best to restructure the organization to make it manageable.

Spin units off, shrink them, reorganize, upgrade risk management — whatever it takes. But don't blithely assume everything will work out. It won't, and when it doesn't policymakers will be left with only one option — cutting the giants down to size.

The time for fighting Dodd-Frank has passed. It's time to start living it.

Doing that is the surest path to regaining the public's trust and respect, and only when that has been accomplished will the industry have the standing to request changes to Dodd-Frank.

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