A half decade after the collapse of Lehman Brothers Holdings Inc. and Bear Stearns Cos. Inc.--and the near death of American International Group Inc. (AIG)--the debate regarding how to address "To Big to Fail" (TBTF) institutions remains in limbo, leaving financial executives unsure of their biggest banking relationships and continued, reliable access to credit and the capital markets.
If recent events and regulator statements are any indication, it may be a full decade before lawmakers and banking leaders are confident of the regulatory mechanisms to avoid and mitigate a meltdown. That will end up leaving corporate clients in a multi-year regulatory vacuum that could have a large, detrimental economic impact.
"These are big boys and they can adapt day to day, but the long-term uncertainty can eat away at the confidence of executives as they look to plan a firm's financial future," says Kevin L. Petrasic, a partner in the Global Banking and Payments Systems practice for law firm Paul Hastings in Washington, D.C. "At the end of the day they would rather have something bad that is certain, than something uncertain that could be less onerous but could also play out terrible."
Dodd-Frank Adds to the Uncertain Mix
Key to the TBTF debate is the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in 2010. The law increases regulations on capital levels and trading activities of the largest financial firms. The goal of these rules is making banks less likely to fail by avoiding, theoretically, the same risky behavior that resulted in the 2008 financial crisis.
Many of these rules remain under debate, including curbs on proprietary trading and the determination of a systemically important financial institution (SIFI) as defined by the U.S. Treasury Department's Financial Stability Oversight Council (FSOC). Despite some pushback, however, several of the preventive measures included in Dodd-Frank are currently being implemented by the largest U.S. banks, albeit slowly and with some rancor.
But while rules intended to prevent the next financial crisis may be falling into place, the Dodd-Frank provisions on what to do if a big bank is already falling off the cliff toward impending doom have been met with skepticism and outright legal challenges that may push the TBTF debate years into the future.
The post-failure rules include macabre death-related terms, such as "living wills," which deal with the fallout of a big bank on its...