WASHINGTON — More than a year after the Dodd-Frank Act was supposed to put the issue to rest, the question of whether "too big to fail" still exists is once again consuming the financial services industry.

Moody's Investor Services provided powerful ammunition Wednesday to those who argue the regulatory reform law ended the era of bailouts by downgrading the long-term rating of Bank of America Corp. and Wells Fargo & Co., as well as the short-term rating of Citigroup Inc., citing increased probability that the government would let such firms fail.

But a top community banking group sought Tuesday to block the merger of Capital One and ING Direct USA — as well as any other merger that would create a firm with more than $100 billion of assets — in part because they feared regulators were not yet prepared to unwind a large firm.

The disagreement on whether the regulatory reform law went far enough to ensure the government would never again prop up a systemically important firm extended even to experts in the policy arena during a debate this week at American Banker's Regulatory Symposium.

On one side was Tom Hoenig, the president of the Federal Reserve Bank of Kansas City, who said too big to fail is alive and well.

"The interconnectedness that ... is there today will be there during the next crisis, and that will cause any Treasury secretary, no matter who appoints him, to hesitate," said Hoenig. "That's life. The reality is that you bail them out."

But H. Rodgin Cohen, a partner with Sullivan and Cromwell and one of the nation's top banking lawyers, disagreed. He argued that Congress went as far as it could to ensure the government could not again bail out large troubled firms, and noted a host of new regulations that are being put in place. Those included new resolution powers for the Federal Deposit Insurance Corp. as well as higher capital and liquidity standards.

"I would argue that Dodd-Frank has largely eliminated 'too big to fail' for major US banks, perhaps even totally," Cohen said.

Although both Hoenig and Cohen spoke before Moody's announcement, the ratings agency appeared to support Cohen's view.

"The downgrades result from a decrease in the probability that the US government would support the bank, if needed," the ratings agency wrote in a statement on Bank of America. "Moody's believes that the government is likely to continue to provide some level of support to systemically important financial institutions. However, it is also more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute. Moody's is therefore lowering the amount of support it incorporates into Bank of America's ratings to levels reflected prior to the crisis."

Yet community bankers argued that too big to fail isn't over yet, while allowing that eventual implementation of the Dodd-Frank law may help.

Chris Cole, senior vice president and regulatory counsel for the Independent Community Bankers of America, testified Tuesday before the Fed, saying the central bank must issue a moratorium on all large bank mergers until the Financial Stability Oversight Council and other regulators have taken steps necessary to ensure no institution is too big to fail.

At the American Banker conference later the same day, Cole made the same point, asking Cohen, Hoenig and Randall Kroszner, the former Fed governor, what should be done in the interim while regulators continue to work on the issue.

Cohen, who noted that his firm represents ING on the deal, said he is supportive of free markets and argued there was no reason to ban mergers above a certain level, saying Dodd-Frank gives regulators the power to properly supervise large institutions.

"I find moratoria abhorrent," Cohen said. "They are simply artificial constraints."

Cohen said regulators should let new rules work before "immediately slapping on a moratorium."

If a moratorium were applied, it would prohibit a $100 billion-asset bank institution from acquiring a $500 million bank, "that was a plain mom-and-pop bank," Cohen said.

"Why would you possibly want to do that except to deprive the shareholders of the $500 million bank of the best possible price?" he asked.

Hoenig said he tended to agree with Cohen, but said free markets must be symmetrical. Under the current system, he was not sure that was the case. "Free market capitalism is success and failure," Hoenig said. "If all you're doing is privatizing your success and socializing the loss, you have long abandoned free market. And I fear that when you think of too big to fail, you have abandoned free market."

Hoenig said it is crucial to ask how the acquisition is being paid for, whether it depletes or enhances tangible capital, whether the risk is being sufficiently mitigated, and what the effect is on the concentration of credit. (Capital One says the merger would not make it more systemically important or overly complex, and it plans to stick to traditional banking activities.)

But Cole pressed the panel to explain where regulators should draw the line on "too big" banks.

Kroszner, now a professor at the University of Chicago Booth School of Business, stressed that it would be a mistake to fixate just on assets. He used AIG and Metlife as an example — the latter is a bigger institution, but the former is much more complex.

"This is one of the things the FSOC is dealing with right now, trying to think about what those lines are," he said. "And I worry that drawing a line just means that you could simply go to the other side of it."

Asked why FSOC has taken so long to even determine which firms are systemically important, Kroszner jokingly said, "Because it ain't easy. What Congress did is took all the hard questions and threw them back to the regulators, and that's why it's incomplete."

Hoenig said regulators recognize it is an "impossible" task, and said the only way to end too big to fail is to force commercial banks to be less complex, essentially ring-fencing their basic deposit and lending activities.

But it isn't just regulators and industry representatives wrestling with the question.

Rep. Shelley Moore Capito, the chairwoman of the financial institutions subcommittee, told the American Banker conference on Tuesday that as long as the issue remains unclear, there will be problems in the market.

"It is difficult to determine if we have truly ended 'Too Big to Fail,'" she said. "We had a hearing in my subcommittee in June on this very topic. The consensus was that no one really knows … We will continue with aggressive oversight on this issue. We must find a solution that ends the market's expectation of future government interventions in times of crisis."

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