Law Commons^™

Too Many To Fail: Against Community Bank Deregulation, Jeremy C. Kress, Matthew C. Turk

Northwestern University Law Review

Since the 2008 financial crisis, policymakers and scholars have fixated on the problem of “too-big-to-fail” banks. This fixation, however, overlooks the historically dominant pattern in banking crises: the contemporaneous failure of many small institutions. We call this blind spot the “too-many-to-fail” problem and document how its neglect has skewed the past decade of financial regulation. In particular, we argue that, for so- called community banks, there has been a pronounced and unjustifiable shift toward deregulation, culminating in sweeping regulatory rollbacks in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.

As this Article demonstrates, this deregulatory trend rests …

Basel Iii D: Swiss Finish To Basel Iii, Christian M. Mcnamara, Natalia Tente, Andrew Metrick

Journal of Financial Crises

After the Basel Committee on Banking Supervision (BCBS) introduced the Basel III framework in 2010, individual countries confronted the question of how best to implement the framework given their unique circumstances. Switzerland, with a banking industry that is both heavily concentrated and very large relative to the size of its overall economy, faced a special challenge. It ultimately adopted what is sometimes referred to as the “Swiss Finish” to Basel III—enhanced requirements applicable to Switzerland’s “too-big-to-fail” banks Credit Suisse and UBS that go beyond the base requirements established by the BCBS. Yet the prominent role played by relatively new contingent …

Too-Big-To-Fail Shareholders, Yesha Yadav

Vanderbilt Law School Faculty Publications

To build resilience within the financial system, post-Crisis regulation relies heavily on banks to fund themselves more fully by issuing equity. This reserve of value should buttress failing banks by providing a mechanism to pay off creditors and depositors and preserve the health of financial markets. In the process, shareholders are wiped out. Scholars and policymakers, however, have neglected to examine which equity investors, in fact, are purchasing bank equity and taking on the default risk of U.S. banks. This Article addresses this question. First, it shows that five asset managers - BlackRock, Vanguard, State Street Global Advisors, Fidelity and …

Spoe + Tlac = More Bailouts For Wall Street, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

A primary goal of the Dodd-Frank Act is to end “too big to fail” (TBTF) bailouts for systemically important financial institutions (SIFIs) and their creditors. Title II of Dodd-Frank establishes the Orderly Liquidation Authority (OLA), which empowers the Secretary of the Treasury to appoint the Federal Deposit Insurance Corporation (FDIC) as receiver for failed SIFIs. Title II requires the FDIC to liquidate failed SIFIs and to impose any resulting losses on their shareholders and creditors. Title II establishes a liquidation-only mandate because Congress did not want a failed megabank to emerge from an OLA receivership as a “rehabilitated” SIFI.

The …

Toward A Critical Corporate Law Pedagogy And Scholarship, André Douglas Pond Cummings, Steven A. Ramirez, Cheryl L. Wade

Faculty Scholarship

In recent years, the publicly held corporation has assumed a central position in both the economic and political spheres of American life. Economically, the public corporation has long acted as the key institution within American capitalism. Politically, the public corporation now can use its economic might to sway electoral outcomes as never before. Indeed, individuals who control public firms wield more economic might and political power today than ever before. These truths profoundly shape American society. The power, control, and role of the public corporation under law and regulation, therefore, hold more importance than at any other time period.

Even …

The Financial Industry's Plan For Resolving Failed Megabanks Will Ensure Future Bailouts For Wall Street, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

The high-risk business model of large financial conglomerates (frequently called “universal banks”) was an important cause of the financial crisis. Universal banks rely on cheap funding from deposits and shadow banking liabilities to finance their speculative activities in the capital markets. By combining deposit-taking and short-term borrowing with underwriting, market making, and trading in securities and derivatives, the universal banking model creates a strong likelihood that serious problems occurring in one sector of the financial industry will spread to other sectors. To prevent such contagion, federal regulators have powerful incentives to bail out universal banks and protect all of their …

Single Point Of Entry And The Bankruptcy Alternative, David A. Skeel Jr.

All Faculty Scholarship

This Essay, which will appear in Across the Great Divide: New Perspectives on the Financial Crisis, a Brookings Institution and Hoover Institution book, begins with a brief overview of concerns raised by the Lehman Brothers bankruptcy about the adequacy of our existing architecture for resolving the financial distress of systemically important financial institutions. The principal takeaway of the first section is that Title II as enacted left most of these issues unanswered. By contrast, the FDIC’s new single point of entry strategy, which is introduced in the second section, can be seen as addressing nearly all of them. The …

Narrow Banking As A Structural Remedy For The Problem Of Systemic Risk: A Comment On Professor Schwarcz's Ring-Fencing, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

In a recent article, Professor Steven Schwarcz describes the concept of "ring-fencing" as a "potential regulatory solution to problems in banking, finance, public utilities, and insurance." Ring-fencing has gained particular prominence in recent years as a strategy for limiting the systemic risk of large financial conglomerates (also known as "universal banks"). Professor Schwarcz’s article describes several ring-fencing plans that have been adopted or proposed in the United States, the United Kingdom, and the European Union.

This Comment argues that "narrow banking" is a highly promising ring-fencing remedy for the risks created by universal banks. As the Comment explains, narrow banking …

A Two-Tiered System Of Regulation Is Needed To Preserve The Viability Of Community Banks And Reduce The Risks Of Megabanks, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

The financial crisis of 2007-2009 and its aftermath have accelerated a consolidation trend that has transformed the U.S. banking system during the past three decades. During that period, the number of community banks and their share of the banking industry’s assets have fallen by more than half, while the largest banks have captured much of the industry’s assets. In responding to the financial crisis, the federal government encouraged further consolidation by adopting extraordinary assistance programs and forbearance measures designed to ensure the survival of the biggest institutions. In contrast, federal officials gave little help to community banks and subjected them …

Turning A Blind Eye: Why Washington Keeps Giving In To Wall Street, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

As the Dodd–Frank Act approached its third anniversary in mid-2013, federal regulators failed to meet statutory deadlines for more than 60% of the required implementing rules. The financial industry has undermined Dodd–Frank by lobbying regulators to delay or weaken rules, by suing to overturn completed rules, and by pushing for legislation to freeze agency budgets and to repeal Dodd–Frank’s key mandates. The financial industry did not succeed in its efforts to prevent President Obama’s re-election in 2012. Even so, the Obama Administration has continued to court Wall Street’s leaders and has not placed a high priority on implementing Dodd–Frank.

At …

Citigroup: A Case Study In Managerial And Regulatory Failures, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

Citigroup has served as the poster child for the elusive promises and manifold pitfalls of universal banking. When Citicorp merged with Travelers to form Citigroup in 1998, Citigroup’s leaders and supporters asserted that the new financial conglomerate would offer unparalleled convenience to its customers through “one-stop shopping” for banking, securities and insurance services. They also claimed that Citigroup would have a superior ability to withstand financial shocks due to its broadly diversified activities.

During its early years, Citigroup was embroiled in a series of high-profile scandals, including tainted transactions with Enron and WorldCom, biased research advice, corrupt allocations of shares …

Beyond Macro-Prudential Regulation: Three Ways Of Thinking About Financial Crisis, Regulation And Reform, Tamara Lothian

Tamara Lothian

This paper considers the debate about the "macro-prudential regulation" of finance in the context of a broader view of the relation of finance to the real economy. Five ideas are central to the argument. The first idea is that the two dominant families of ideas about finance and its regulation share a failure of institutional imagination. Neoclassical economists blame localized market and regulatory failures for the troubles of finance. Keynesians invoke the way in which the money economy may amplify cycles of despondency and euphoria. Neither current of thought recognizes that the institutions of finance in particular, and of the …

Save The Economy: Break Up The Big Banks And Shape Up The Regulators, Charles W. Murdock

Charles W. Murdock

Save the Economy: Break Up the Big Banks and Shape Up the Regulators

The U.S. economy is still reeling from the financial crisis that exploded in the fall of 2008. This article asserts that the big banks were major culprits in causing the crisis, by funding the non-bank lenders that created the toxic mortgages which the big banks securitized and sold to unwary investors. Paradoxically, banks which were then too big to fail are even larger today.

The article briefly reviews the history of banking from the Founding Fathers to the deregulatory mindset that has been present since 1980. It …

Dodd-Frank Sampler: How Congress Codified An Article 1 Financial Takeover, Anthony Hearn

University of Miami Business Law Review

No abstract provided.

Complex Financial Institutions And Systemic Risk, Manuel A. Utset

Scholarly Publications

No abstract provided.

Making Sense Of The New Financial Deal, David A. Skeel Jr.

All Faculty Scholarship

In this Essay, I assess the enactment and implications of the Dodd-Frank Act, Congress’s response to the 2008 financial crisis. To set the stage, I begin by very briefly reviewing the causes of the crisis. I then argue that the legislation has two very clear objectives. The first is to limit the risk of the shadow banking system by more carefully regulating the key instruments and institutions of contemporary finance. The second objective is to limit the damage in the event one of these giant institutions fails. While the new regulation of the instruments of contemporary finance—including clearing and exchange …

The Dodd-Frank Act: A Flawed And Inadequate Response To The Too-Big-To-Fail Problem, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") was enacted in July 2010. Dodd-Frank's preamble proclaims that one of the statute's primary purposes is to "end 'too big to fail' [and] to protect the American taxpayer by ending bailouts." Dodd-Frank does contain useful reforms, including potentially favorable alterations to the supervisory and resolution regimes for systemically important financial institutions ("SIFIs"). However, Dodd-Frank falls far short of the fundamental reforms that would be needed to eliminate (or at least greatly reduce) the public subsidies that are currently exploited by "too big to fail" ("TBTF") financial institutions.

After briefly describing …

Repondre A La Crise : Activite Irreprochable, Transparence Des Marches, Entraide Internationale Et Autres Developpements De La Pratique Et De La Jurisprudence, Christian Bovet, Fabien Liegeois

Dr. Fabien LIEGEOIS

The New Financial Deal: Understanding The Dodd-Frank Act And Its (Unintended) Consequences, David A. Skeel Jr.

All Faculty Scholarship

Contrary to rumors that the Dodd-Frank Act is an incoherent mess, its 2,319 pages have two very clear objectives: limiting the risk of the shadow banking system by more carefully regulating derivatives and large financial institutions; and limiting the damage caused by a financial institution’s failure. The new legislation also has a theme: government partnership with the largest Wall Street banks. The vision emerged almost by accident from the Bear Stearns and AIG bailouts of 2008 and the commandeering of the bankruptcy process to rescue Chrysler and GM in 2009. Its implications for derivatives regulation could prove beneficial: Dodd-Frank will …

How "Big" Became Bad: America's Underage Fling With Universal Banks, Lawrence G. Baxter

Lawrence G. Baxter

In little more than a decade gigantic new financial institutions have emerged in America. These organizations are quite different from their predecessors in that they share the highly complex, diversified characteristics of foreign “universal banks.” They are still in the process of developing experienced and mature operational and risk management systems. During this same period, the regulatory framework necessary to match the size, power and hazards generated by these new universal banks remains underdeveloped, and the primary framework around which the system is being constructed, namely Basel II, lies in tatters in the wake of the financial crisis of 2007-08. …

An End To Too Big To Let Fail? The Dodd–Frank Act’S Orderly Liquidation Authority, Thomas J. Fitzpatrick Iv, James B. Thomson

James Thomson

One of the changes introduced by the sweeping new fi nancial market legislation of the Dodd–Frank Act is the provision of a formal process for liquidating large fi nancial fi rms—something that would have been useful in 2008, when troubles at Lehman Brothers, AIG, and Merrill Lynch threatened to damage the entire U.S. fi nancial system. While it may not be the end of the too-big-to-fail problem, the orderly liquidation authority is an important new tool in the regulatory toolkit. It will enable regulators to safely close and wind up the affairs of those distressed fi nancial fi rms whose …

What The Financial Services Industry Puts Together Let No Person Put Asunder: How The Gramm-Leach-Bliley Act Contributed To The 2008 - 2009 American Capital Markets Crisis, Joseph Karl Grant

Journal Publications

The current subprime financial crisis has shaped up to be one of the most dramatic and impactful events in the past few decades. No one particular factor fully accounts for why the American economy suffered setbacks unseen since the Great Depression of the 1930s. Some of the roots of the current financial crisis started taking hold in 1999 when Congress passed the Financial Services Modernization Act, also known as the Gramm-Leach-Bliley Act. Gramm-Leach-Bliley brought about sweeping deregulation to the financial services industry. In essence, Gramm -Leach-Bliley swept away almost six decades of financial services regulation precipitated by the Great Depression …

Paying The Price For Too Big To Fail, Cornelius K. Hurley

Faculty Scholarship

We find ourselves in an economic crisis, the severity of which few persons living today have witnessed. Fear, the natural accompaniment of such crises, arises from our uncertainty about the depth and duration of the crisis. The consensus is that a restoration of confidence is fundamental to a recovery. From the eye of the storm, it is difficult to assess the effectiveness of attempts at quelling its ravages. Yet, we may have little choice but to begin making those assessments as the architecture of the new order is being designed now.

The origins of the current crisis are well recorded. …

Too Big To Fail, Too Blind To See, Tom C.W. Lin

UF Law Faculty Publications

Too Big to Fail by Andrew Ross Sorkin offers a meticulous re-telling of one of the most important periods in recent history. As regulators, bankers, lawyers, scholars, and other interested parties sift through the rubble in search of knowledge about the crash, Too Big to Fail serves both as a chronicle of the recent past and a cautionary tale for the immediate future. Acknowledging past missteps, uncovering root causes, and correcting systemic shortcomings to prevent similar failure is arguably the key economic and regulatory challenge of our time. Part I of this Essay summarizes key episodes of the financial crisis …

The Dark Side Of Universal Banking: Financial Conglomerates And The Origins Of The Subprime Financial Crisis, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

Since the subprime financial crisis began in mid-2007, banks and insurers around the world have reported $1.1 trillion of losses. Seventeen large universal banks account for more than half of those losses, and nine of them either failed, were nationalized, or were placed on government-funded life support. Central banks and governments in the U.S., U.K. and Europe have provided $9 trillion of support to financial institutions to prevent the collapse of global financial markets.

Given the massive losses suffered by universal banks, and the extraordinary governmental assistance they have received, they are clearly the epicenter of the global financial crisis. …

Comment Letter To The U.S. Treasury Department Concerning The Regulatory Structure For Financial Institutions, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

This comment letter was submitted to the U.S. Treasury Department in connection with that Department's review of proposals for changes in the regulatory structure for financial institutions. The comment letter presents the following policy recommendations: (1) the thrift charter should be eliminated, existing thrifts should be required to convert into banks, and the Office of Thrift Supervision should be merged with the Office of the Comptroller of the Currency (OCC); (2) the dual banking system should be preserved and strengthened in order to promote innovation in banking regulation and to support the community bank sector; (3) at least one federal …

Too Big To Fail: Moral Hazard In Auditing And The Need To Restructure The Industry Before It Unravels, Lawrence A. Cunningham

GW Law Faculty Publications & Other Works

Large audit firms may believe that they are too big to fail. Arthur Andersen's 2002 criminal indictment reduced their number from five to four, and the government decided in 2005 to avoid indicting KPMG for crimes it admitted committing. If audit firms interpret the government's reluctance to indict as signaling aversion to tough action against them, moral hazard arises. This offsets auditing improvements mandated by the Sarbanes-Oxley Act of 2002 that are designed to strengthen auditors' reputations with managers for thoroughness and improve financial statement reliability. Neutralizing this moral hazard requires a credible alternative industry structure so that when a …

What Do Exit Polls And Flu Vaccine Shortages Have In Common?, Albert A. Foer, Robert H. Lande, F.M. Scherer

All Faculty Scholarship

What do exit polls and flu vaccine shortages have in common? Both involve situations where society has come to rely excessively on too few entities. When even one company makes a mistake society can suffer significantly. This short piece advocates that we abandon our almost laissez faire tolerence towards high concentration, and rely upon competition, rather than on monopoly or a small number of producers.