Are We Done With ‘Too Big to Fail’?

Treasury Secretary Jack Lew testifies before the US Senate Finance Committee about the debt limit on October 10, 2013, on Capitol Hill in Washington, DC. 
National Journal
Catherine Hollander
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Catherine Hollander
Dec. 5, 2013, 5:40 a.m.

End­ing “too big to fail” — the idea that some fin­an­cial in­sti­tu­tions are so large that the gov­ern­ment would bail them out rather than risk the dam­age to the fin­an­cial sys­tem that would res­ult from their de­mise — was a key goal of the 2010 Dodd-Frank fin­an­cial re­form law.

In re­marks de­livered be­fore the Pew Char­it­able Trusts in Wash­ing­ton on Thursday, Treas­ury Sec­ret­ary Jac­ob Lew said he thought the U.S. may have met that aim.

“Earli­er this year, I said if we could not with a straight face say we ended ‘too big to fail,’ we would have to look at oth­er op­tions,” he said. “Based on the to­tal­ity of re­forms we are put­ting in place, I be­lieve we’ll meet that test.”

But in the re­mainder of his re­marks, which re­viewed the steps the ad­min­is­tra­tion has taken since the fin­an­cial crisis to ward off the next one, Lew said that con­stant vi­gil­ance — and well-fun­ded reg­u­lat­ors — would be ne­ces­sary to spot fu­ture threats.

“To be clear, there’s no pre­cise point at which you can prove with cer­tainty that we’ve done enough,” he said of “too big to fail.” “If in the fu­ture we need to take fur­ther ac­tion, we will not hes­it­ate.”

Some say ad­di­tion­al steps are ne­ces­sary now. Last month, Sens. Sher­rod Brown, D-Ohio, Dav­id Vit­ter, R-La., and Carl Lev­in, D-Mich., sent a let­ter to fin­an­cial reg­u­lat­ors ur­ging them to ad­opt stronger lever­age re­quire­ments for big banks.

“Des­pite re­ceiv­ing as­sist­ance from tax­pay­ers in 2008, today, the na­tion’s four largest banks — JP­Mor­gan Chase, Bank of Amer­ica, Cit­ig­roup, and Wells Fargo — are nearly $2 tril­lion lar­ger today than they were be­fore the crisis. Their growth has been aided by an im­pli­cit guar­an­tee — fun­ded by tax­pay­ers and awar­ded by vir­tue of their size — as the mar­ket knows that these in­sti­tu­tions have been deemed ‘too big to fail,’ ” their of­fices said in a state­ment.

Reg­u­lat­ors are ex­pec­ted to vote on a fi­nal ver­sion of a reg­u­la­tion ban­ning banks from mak­ing spec­u­lat­ive bets with their own money, known as the “Vol­ck­er Rule,” next week. It is a core pro­vi­sion of the Dodd-Frank law, and Lew has pressed the five agen­cies charged with writ­ing the rule to fin­ish it by the end of 2013.

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