Regulators Flunk 11 Big Banks - Slim Down

Dear William,

Wall Street banks have immense power in Washington, so it's worth noting when Federal Regulators start to push back.   That's why we were pleased to see the FDIC and the Federal Reserve send the big Banks a message: they are still too big, still too complicated, and still have a long way to go in reassuring the public that the failure of one of these institutions would not cause disastrous economic damage.

First some back story:  Under the Dodd-Frank Act each of the nation's largest Financial Institutions is required to submit a "living will" - a plan for the company to wind down its operations in the event of failure.   Advance planning for an orderly “resolution” is a crucial backstop against pressure for more government bailouts like those we saw during the 2008 financial crisis. 

The idea here is simple:  the onus is on the big Banks to show that they are truly not ”too big to fail” – that their failure would not drag down the broader U.S. economy.

Earlier this month, the FDIC and the Federal Reserve completed their review of 11 living wills submitted thus far. Their verdict: not good enough.  These Banks, they concluded, are still too Big and complex to fail without severe Negative impacts on the Economy.

What happens now?  The Banks must go back to the drawing board.  Eventually, if the Regulators remain unsatisfied, they have the Authority to Break up the biggest Banks or take other steps to reduce the risk they pose to the Economy.

This warning is just a first step. We still don’t know what will happen in the next round, or whether the Regulators will have the backbone to tell Banks that they must genuinely downsize and simplify their operations.   In fact, we don’t know nearly enough about this entire process, because so much of what the living wills say is kept secret. The public needs to be able to see more so we can hold the banks and regulators accountable.

That’s why we need to keep paying attention, and keep calling for change. In the meantime, it's worth pausing to appreciate moves in the right direction: the FDIC and the Fed gave a failing grade for failing work. Sometimes Wall Street doesn’t get its way. We're going to keep fighting to make sure this won't be the last time.

Lisa Donner
Executive Director
Americans for Financial Reform