While Professor Cornelius Hurley was taking regulators to task for "forgetting" to end too big to fail in his recent BankThink column, he seems to have forgotten to mention several significant developments.
First, although his column includes numerous references to a so-called TBTF "subsidy," it overlooks extensive research examining whether markets expect large financial institutions to be bailed out by the government in a crisis. This includes a 94-page report from the Government Accountability Office last July, which concluded that any advantage large banks receive due to TBTF perceptions has been significantly reduced or reversed.
The column also neglects to discuss the immense post-crisis overhaul of the regulatory capital framework, which now requires all banks especially the larger banks to hold significantly more and higher quality capital. That is not to mention the entirely new bank liquidity framework, including the liquidity coverage ratio and net stable funding ratio, which requires banks to keep sufficient liquidity on hand to meet worst-case needs in a crisis.
Moreover, the column ignores entirely the new orderly liquidation authority established in the Dodd-Frank Act, as well as the Federal Deposit Insurance Corp.'s single point of entry resolution strategy. These efforts will help ensure that even the largest banks can fail in an orderly fashion and without a taxpayer bailout.
This new resolution framework includes, among other things, new international standards requiring global systemically important banks to hold sufficient loss-absorbing capacity to support their full recapitalization in resolution. It also includes voluntary industry changes under an International Swaps and Derivatives Associationprotocol to remove existing impediments in derivatives contracts to orderly resolution.
Finally, the column suggests that in failing to introduce measures that force large banks to resize, Federal Reserve Governor Daniel Tarullo and others are acting inconsistently with the law. The facts here are simple: there is no mandate in Dodd-Frank or elsewhere requiring the largest banks to be broken up or forcibly shrunk.
A lot has been done to address TBTF, and yes, more needs to be done. But an open and honest debate about the issue must acknowledge these developments toward the common goal of ending TBTF.
Paul Saltzman is president of The Clearing House Association, owned by 24 of the world's largest commercial banks.