Many have suggested that the de facto governmental policy of “too big to fail” is one of the causes of the severity of the 2008 Financial Crisis in the United States. One of the express purposes of the Dodd-Frank financial market reform legislation of 2010 was “to end ‘too big to fail.’” The Dodd-Frank Act attempts to address “too big to fail” by expanding the regulatory reach to non-bank systemically-important institutions, by creating an “orderly liquidation authority,” and by limiting the authority of regulatory bodies that give loans to failing banks.
However, the Act is incomplete. Even with these instruments, economic conditions continue to exist where large banks receive discounted rates for their funds, because market participants continue to perceive their loans and equity as less risky because they remain “too big to fail.” Additionally, Dodd-Frank’s enhanced prudential standards rely heavily on stronger capital requirements, and large banks can devise strategies that comply with these requirements despite the risk. To find out what is missing from Dodd-Frank, this article surveys the existing literature to discover a number of alternative approaches to ending “too big to fail.”