Remember the Too Big to Fail Banks (TBTF)? Dodd-Frank makes it easier for the government to close down these banks and use their assets to pay off depositors in a crisis. As the Dodd-Frank rules get written and released, Wall Street is reacting.
Moody’s Investors Service cut its ratings on four of the biggest U.S. banks after deciding the government would be less likely to help them repay creditors in a crisis. Bloomberg Nov 15, 2013 6:07 AM CT
Although it was not well understood in the media/blogs, one of the big problems for banking officials during the financial crisis was that the banking laws did not provide for a way to “resolve” huge failing mega-banks and non-bank financial companies. For example, if the FDIC had decided to close down Citibank, it would have caused a crash in Citicorp, the holding company and major disruption among Citicorp non-bank subsidiaries but the government would not have had the authority to resolve those parts of the bank holding company or to make sure assets of the whole group were available to pay bank depositors back. Although some critics asked why FDIC was not acting to shut down Citi as it would a smaller bank, few grasped or were willing to grasp the limits of US bank law that made any such action impossible.The same issues, but even more so, applied to AIG which was not a bank, not subject to FDIC resolution authority. But now
“We believe that U.S. bank regulators have made substantive progress in establishing a credible framework to resolve a large, failing bank,” Robert Young, a managing director at Moody’s, said in a statement. “Rather than relying on public funds to bail out one of these institutions, we expect that bank holding company creditors will be bailed-in and thereby shoulder much of the burden to help recapitalize a failing bank.”
Dodd-Frank was a major initiative of the Obama administration and Treasury Secretary Geithner. It was bitterly opposed by banks and also widely derided by some “progressives” for being too weak.
U.S. banking regulators have been preparing rules and procedures that seek to allow the government to wind down even the largest financial companies without providing taxpayer assistance. The plans would require investors to accept losses and could require bonds to be converted into equity capital.