Dodd-Frank, Financial Institution Rescues and Financial Crisis: The Problem of Too Interconnected to Fail

James P. HAWLEY Professeur, School of Economics and Business, Saint Mary’s College of California ; directeur, Elfenworks Center for the Study of Fiduciary Capitalism, Saint Mary’s College of California.

The article argues that a major omission in the Dodd-Frank financial reform act focuses on the problem of to interconnected to fail banks and non-bank (shadow) banks. While Dodd-Frank promises “no more” bailouts of too big to fail banks (TBTF) and non-bank banks, the paradox of a lacking a major focus on too interconnected to fail institutions (TITF) is actually to: increase systemic risk under some conditions; and create a “back door” set of complex and contorted processes to “bailout” financial institutions in spite of political promises not to. This is accomplished by removing 'bailout’ authority from the Federal Reserve and creating an Orderly Liquidation Authority modelled on the Federal Deposit Insurance Corporation which along with the Department of the Treasury can in fact “bailout” financial institutions under certain conditions. Yet this new authority may fail given its focus on TBTF rather than (as well) TITF structures.