One requirement of the Dodd-Frank Financial Reform bill is that the big banks are required to file resolution plans, or "living wills," outlining how they could be broken up in the event of failure. In her interview today with Reuters, FDIC chair Sheila Bair says that some of the large, complex institutions, (Citi, Goldman Sachs, et al.) would have to be restructured if they can't come up with a credible resolution plan. Of course, they can't come up with a credible resolution plan that would cause the Federal Bailout Machine to stand down during a crisis -- that's why they're Too Big To Fail.
It is encouraging that Bair is openly pointing out the potential weaknesses of Dodd-Frank, and that she is making threats to do something about the Too Big To Fail problem, but we can easily see this process turning into a long, drawn out wrestling match between the regulators, the banks and their well-armed brigade of lobbyists.
And instead of tackling issues that matter, like size and leverage, we can easily see this devolving into a narrow argument over how to simplify the legal structure of these large institutions. The complex legal structures of the Bank Holding Company, for example, was a problem in 2008, but only because these firms were already so outlandishly large and so dangerously levered in the first place.
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FDIC calls for big bank restructuring
(Reuters) - America's big international banks should restructure their operations unless they can prove they can easily be broken up if they start toppling during a financial crisis, said U.S. regulator Sheila Bair.
Multinationals will need to set up more foreign subsidiaries and realign their legal structures to make it easier for regulators to liquidate them if necessary, Bair told the Reuters Future Face of Finance Summit.
"If they can't show they can be resolved in a bankruptcy-like process... then they should be downsized now," said Bair, chairman of the Federal Deposit Insurance Corp.
"There is no reason in the world why they should get some special treatment backstop that other businesses in this country don't have," Bair said.
She also said investors need to accept that they will get lower returns from banks that hold higher capital and run safer operations.
Bair said traditional deposit-taking banks in the United States probably can produce plans for a shutdown, but large multinationals with complex legal structures need to simplify.
"The burden is on them initially to show us that they don't think they need subsidiarization," she said. "They need to give us a plan on how they can be resolved on an international basis without it."
A former general counsel at Bair's agency said there may a tension between banks trying to meet these new regulations and maximizing shareholder value.
Bair made clear she was not advocating that some large banks be broken up now -- only that they need to make structural changes so that they could be broken up if they begin to fail.
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