How to Let Too-Big-To-Fail Banks Fail
It is now almost three years since the Dodd-Frank Act was enacted to prevent the possibility that taxpayers would have to bail out "too-big-to-fail" banks. Yet there is serious concern that the legislation has not solved the problem. Many have called for new laws to limit the activities of very large banks or even, as in the bill recently introduced by Sens. Sherrod Brown and David Vitter, to cause them to break up. On Wednesday, the House Financial Services Oversight and Investigations Subcommittee held hearings on the continuing bailout issue, at which one of us (John Taylor) testified.
In our view, a straightforward reform of the bankruptcy code will facilitate the orderly bankruptcy of large failing financial institutions and thereby deal with the bailout problem. The reform should be enacted now, whether or not further actions are taken on big banks.