Rejection of the idea that any bank is too big to fail (TBTF) is currently universal among U.S. policymakers. Yet some apprehension persists that this policy consensus may be fragile. That apprehension may continue until worries of too big to fail are replaced with confidence that U.S. banks are safe to fail.

The size of U.S. banks relative to the overall financial system, and the panoply of agency resources now available for resolution, can be marshalled into a powerful argument that there is no need to forebear resolution of any failing banking institution. The persistence of TBTF concern may then be a matter of perception as to whether those who say that they reject TBTF really mean it, or will really mean it when the chips are down and the cards are played.

The accumulation of new tools by statute and regulation has made bank rescues unnecessary, but it does not make them impossible.  The legal structure of failing bank resolution provisions of the Dodd-Frank Act (Title II) rests upon an understanding that bankruptcy has precedence, but the emphasis in law and implementing regulations appears to be on how to avoid using bankruptcy.  The backup orderly resolution structure is too easy to invoke when there is consensus among policymakers that bankruptcy would be inadequate.  The primacy of bankruptcy may too readily be overridden.  It needs to be reinforced: the regulatory resolution authority’s role must be seen as secondary and not preferred.

Improving the utility of bankruptcy processes to address failed banks would facilitate transformation of the consensus against rescues into a durable fabric of the regulatory culture.  Much work has been done to design improvements to the function of bankruptcy procedures for bank resolution such that little credibility would attach to arguments for recourse to Title II of Dodd-Frank.  Those improvements need to find their way into law and practice.

I expand upon these themes in a paper recently published in the Federalist Society Review, “The Resolution of Too Big to Fail”.