What Is “Too Big To Regulate?”

Larry Doyle
updated | Author's Website


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 (NYSE:C),Goldman Sachs (NYSE:GS) 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

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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.

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