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What Is “Too Big To Regulate?”

Posted by Larry Doyle on March 4, 2013 8:38 AM |

Going on three years since the passage of the Dodd-Frank Financial Regulatory Reform legislation, aside from a few politicians and perhaps the head of the Federal Reserve nobody  — and I mean nobody — believes that our major financial institutions are anything but “too big to fail.”

We have also learned that “too big to fail” has also come to encompass “too big to regulate” and “too big to prosecute” as well.

How is it that the banks have become “too big to regulate?” Let’s navigate and review a bite-sized script from the Wall Street Journal that highlights this point. 

Big banks are often labeled too big to fail. Would it be more accurate to say too big to understand? In a speech last week, Sen. Sherrod Brown (D., Ohio) referenced data from the Federal Reserve Bank of Dallas. This showed that five of the biggest U.S. financial institutions—J.P. Morgan Chase, Bank of America,Citigroup,Goldman Sachs and Morgan Stanley—have between them 19,654 subsidiaries.

There are often good reasons for banks to have different legal entities. And since they operate globally, banks are often required to set up different units for different activities in each country.

What is often a prime motivation for establishing a ream of separate subsidiaries? So that banks can engage in regulatory arbitrage,

A practice whereby firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulation. Arbitrage opportunities may be accomplished by a variety of tactics, including restructuring transactions, financial engineering and geographic relocation.

The WSJ continues:

Still, the huge number of subsidiaries makes these firms tough to manage in life—and even more difficult to deal with in death. That is why regulators are requiring banks to submit living wills, to provide a road map through this legal maze should a big bank have to be wound up. Good luck finding your way out of that, though.

Good luck finding your way out of that. Perhaps the WSJ should simply have written, “navigate accordingly.”

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Coe

    too big to regulate – indeed. Not sure the fact of a host of legal entities automatically results in the regulatory problem…difficult to Recover/Resolve -for sure..consider the Dodd-Frankenstein alphabet soup of material legal entities/critical operations etc..and what works on a London branch cannot take place in the good old American bank…arbitrage/accounting asymmetry/ring fenced liquidity/capital primacy/hedges mismatched with exposures/differing laws…talk about lifetime employment for the lawyers and regulators…last I looked neither group actually lent money nor generated revenues…that only leaves costs!

    it’s no wonder the media, the investors, and the policymakers in Congress, the Administration, and those on Main St continue to feel the game is rigged…I’ll add another log to the fire…too big a story to allow it to dull our focus into sensory overload submission!

  • Mark J. Novitsky

    They don’t “discover” the “loopholes”…they write them and have them inserted by their co-conspirators / employees (congress & regulators)…like they did with SARBOX. How’d that work out?

  • Peter Scannell

    Already known to be too big to regulate, too big to prosecute, – what has this current congress done to keep Wall Street in check? Reduced the budgets of the financial industry cops!

    Stunningly, today congress has proposed a bill to keep our border patrol budgets intact, yet have chosen to handcuff financial cops by even further reducing their already inadequate budgets.

    Our nation has never suffered greater harm from outside our borders than the harm that has been inflicted on our nation this past decade by the enemy from within!

    Congressional Tea Party activist my ass – Wall Street co-conspirators – absolutely!

  • It appears Fed Governor Jerome Powell has aligned with the ABA…

    Reforms to end “too big to fail” are promising and need time to work, Federal Reserve Governor Jerome Powell said yesterday (04 Mar 13) at the Institute of International Bankers Conference in Washington, D.C.

    “[E]fforts by U.S. and global regulators to fight too big to fail are generally on the right track. The Basel III and Dodd-Frank reforms designed to reduce the probability of failure of large banking firms are sensible and, for the most part, targeted at the causes of the crisis,” Powell said.

    “They [also] are being implemented thoughtfully and effectively,” he added. “I believe that those Financial Stability Board and Dodd-Frank reforms designed to permit the resolution of systemic firms without taxpayer exposure or undue disruption are very promising.”


    Has Congress given any thought to measuring the effectiveness of federal banking and market regulators to ensure the American people that these new reforms are “on the right track?”

    • LD


      Thanks for your comment. I am glad that Powell believes we are on the right track, the problem is nobody else believes it.

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