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A Better Solution for Too-Big-to-Fail Banks 

June 2, 2014
Charles W. Calomiris, Wall Street Journal

Critics of Dodd-Frank have long argued that the law has not ended the danger posed to taxpayers and the financial system by "too-big-to-fail" banks. Instead, the law's "orderly liquidation authority" has institutionalized the problem by creating a formal bailout procedure and earmarking a new source of tax revenue to fund bailouts.

In March, European Central Bank economists Magdalena Ignatowski and Josef Korte released a paper confirming critics' fears. The largest and systemically most important banks, they found, have not perceptibly changed their risk-taking behavior. Megabanks, it seems, don't take Dodd-Frank's orderly resolution authority as a serious constraint on their behavior.

What's next? A new funding requirement—contingent capital—could impose the necessary market discipline on megabanks to avoid their failure and the need for taxpayer bailouts.

Read more: Wall Street Journal

 
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