There is perhaps no issue that drove the passage of the Dodd-Frank Act more than the public perception that certain large institutions enjoyed the backing of the federal government. A situation commonly called “too big to fail” (TBTF). Not by coincidence the first two titles of Dodd-Frank are aimed at addressing, some might claim ending, the too-big-to-fail status of our largest financial institutions. Here I raise a number of concerns and observations that merit meeting the claim of ending TBTF with considerable skepticism.

One reason that debates over TBTF are often so heated is that there is no actual explicit subsidy provided on-budget for such purpose. We can (and should) debate the merits and effects of deposit insurance, for instance, but we don’t debate its existence. It is there. Whether TBTF is real or not is a far trickier question. We are left with no choice but looking for “clues”.
The first clue is the actual text of Dodd-Frank. There is, of course, flowery language about “eliminating expectations…that the Government will shield” parties from losses “in the event of a failure”. But as any first law student should know, vague purposes do not constrain explicit authorities. And Dodd-Frank is quite explicit. Section 204, for instance, is quite clear that the Federal Deposit Insurance Corporation (FDIC) can purchase any debt obligation at par (or even above) of a failing institution. If rescuing a creditor at par is not the very definition of TBTF, I’m not sure what is. Section 201 goes even further by allowing the FDIC to pay “any obligations…” it believes are “necessary and appropriate”. If that sounds vague enough to drive a semi through, then you’re not alone. In fairness, Dodd-Frank does offer a path for ending TBTF without cost to the taxpayer or the rest of the financial industry. But that path is clearly an optional one.