Financial regulatory systems fragmented and unprepared for next crisis, says bailout expert

September 10, 2012 by Jessica Martin, Washington University in St. Louis

The "No More 'Too Big to Fail'" rallying cry is unrealistic, says Cheryl Block, JD, federal taxation, budget and bailout expert and professor of law at Washington University in St. Louis.

"When the next really big economic crisis arises, Congress is unlikely to stick to its 'no bailout' pledge," she says.

"Political 'no more ' assertions—even those ultimately included in statutory text—simply are not credible. As much as Congress would like to eliminate any 'too-big-to-fail' policy, the reality is that there may—and probably will —come a time when the failure of a particular firm or industry would be so economically devastating that Congress would step in to save it, despite earlier protestations to the contrary."

Block says that despite improvements, the financial regulatory regime remains fragmented and unprepared to respond rapidly and coherently to the next .

In her recent article, published in the current issue of the Brooklyn Journal of Corporate, Financial, and Commercial Law, Block explores a "Continuum Approach to and Too Big to Fail."

"Properly calibrating an appropriate solution to different types of requires a … nuanced account of the various levels of risk on the road to 'systemic' in order to better identify danger points and provide mechanisms to ensure that banking regulators are unified in their approach," Block writes.

"Financial regulation reforms should also focus on altering the current regulatory dynamic and structure to eliminate regulator incentives to forbear enforcement at early signs of trouble at large . Such reforms should include lobbying restrictions to reduce large financial firm opportunities for regulatory capture, which often results in special 'white glove' treatment for large banks."

Block argues that legislators need to be more honest with themselves about the extent to which government is already involved in corporate and resolution of bank failure.

"Rather than impose rigid restrictions on regulators' resolution authority, the better approach would be to acknowledge the different possibilities along the private-public continuum and carefully assess elements that should be relevant in deciding which of the various resolution methods is best under particular circumstances," she says.

"In the end, the most important objective is a prudential regulatory and resolution approach to systemic risk that is transparent and equitable for both failing firm stakeholders and the general public."

Explore further: A plan for better banking: Researchers propose model of systemwide diversification

Related Stories

Research: No evidence for 'too big to fail' policies

April 24, 2009

The U.S. economy would be better served by letting failing firms file for bankruptcy rather than by bailing them out under presumptive federal policies that deem them to be "too big to fail," according to new research from ...

Market failure expert says letting Lehman go was good thing

September 10, 2009

Approaching the anniversary of Lehman Brothers' demise, NJIT Finance Professor Michael Ehrlich, an expert on market failure, says that the Feds made the right move when they allowed the investment firm to go bankrupt.

Stock ownership US Congress influenced voting on bailout

March 29, 2010

( -- Personal investments in the stock of financial institutions by members of the House of Representatives and the Senate of the Unites States was positively associated with these institutions receiving bailout ...

Risk management critical to corporate strategy

January 7, 2009

With the consequences of the current financial crisis spreading to the real economy, lawmakers are exploring new regulations to govern the financial markets. The concern among market participants is that policy-makers do ...

Recommended for you

Study sheds new light on ancient human-turkey relationship

January 17, 2018

For the first time, research has uncovered the origins of the earliest domestic turkeys in ancient Mexico. The study also suggests turkeys weren't only prized for their meat—with demand for the birds soaring with the Mayans ...


Adjust slider to filter visible comments by rank

Display comments: newest first

3.4 / 5 (5) Sep 10, 2012
This article is written on the premise that markets don't regulate themselves and we need control freaks in the government to micromanage every facet of life to achieve perfectionist standards. How about we try something different for a change compared to the last 100 years. How about getting government out of the way. No SEC, FDIC, government mandated but officially private Federal Reserve Bank, and the FTC. The Dodd-Frank act was a wet dream for all these institutions and will only make things worse.
3.4 / 5 (5) Sep 10, 2012
Yes, imagine if you can, a bank or financial institution must figure out a way to persuade people to lend them money for investment and must persuade customers to borrow from them, without any govt 'guarantees'.
2.3 / 5 (3) Sep 10, 2012
Garbage. Most Americans have very little to do with the mega banks and would loose nothing if they were allowed to die a quick death.
Let the FDIC take care of retail banks and to heck with the rest.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.