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Unbundling Too Big to Fail

Why Big Is Bad and What to Do About It

By Ganesh Sitaraman July 2014


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Unbundling Too Big to FailWhy Big Is Bad and What to Do About It

By Ganesh Sitaraman July 2014


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1 Introduction and summary

2 Unbundling too big to fail

9 Reforming too big to fail

18 Conclusion

20 Endnotes

Contents


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1 Center for American Progress | Unbundling Too Big to Fail

Introduction and summary

Since he 2008 financial crisis, he problem o financial insiuions being oo big

o ail, or BF, has been ron and cener in he public debae over he reorm and

regulaion o he financial indusry. Commenaors across he poliical specrum

decried bailous o he bigges Wall Sree financial insiuions, arguing ha bail-

ous would esablish oo big o ail as public policy. When i was ime or reorm,

legislaors ried o address his problem, and even incorporaed ino he ull ile o

he Dodd-Frank Ac ha one o he bills purposes was o end oo big o ail.1

Ye more han five years afer he financial crash, he bigges banks are 37 percen

larger han hey were beore,2and he debae over wha o do abou he size o finan-

cial insiuions coninues. Policy proposals range rom improving resoluion mecha-

nisms, o more sringen prudenial sandards such as leverage limis, o charging

ees o eliminae he implici governmen subsidy he bigges banks receive, o

capping he size o he banks, o insiuing a new Glass-Seagall Ac. Each approach

is holy conesed, wih commenaors requenly arguing ha he proposed soluion

will no acually fix he problem o financial insiuions ha are oo big o ail.3

Te problem a he hear o he debae over oo big o ail is ha he popular moniker

has come o mean more han he concern ha big firms ge a governmen bailou in

he even o ailure. I capures a variey o concerns wih he financial indusry: eco-

nomic, compeiive, sysemic, firm level, poliical, legal, and regulaory. Tis repor

idenifies he ull range o reasons reormers migh be worried abou BF. I hen

describes he various policy opions ha are mos requenly discussed wih regard o

reorming BF, and i connecs he specific reorms o he concerns hey address.

o make progress, reormers and criics alike need o engage in a more precise

debae. Criics oo ofen dismiss reorms wihou ully addressing he concernsreormers seek o address, and when oulining proposals, reormers could be

clearer abou he problems hey seek o solve. Ulimaely, people will disagree

abou wha aspecs o BF are mos concerning o hem. Bu he firs sep

oward a more meaningul debae over reorm requires greaer clariy abou he

paricular concernor concernswih big financial insiuions and he specific

soluions ha address hose concerns.


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Unbundling too big to fail

Te underlying concerns wih big financial insiuions can be grouped ino five

caegories: sysemic risk, bailou, compeiion, firm-level concerns, and poliical

conrol. Each incorporaes muliple relaed worries abou he pernicious effecs o

he size o financial insiuions.

Systemic-risk concerns

While here are a variey o definiions o sysemic risk, he basic concep is

simple: sysemic risk exiss when he ailure o a single insiuion would have

significan effecs beyond he firm, o he financial sysem or he economy as a

whole.4Tese ripple effecs are seen as so roubling ha acion mus be aken

o preven hem, wheher ha means bailous afer firm ailure or some orm o

regulaion beore ailure.

Size-based systemic risk

Te concern abou size-based sysemic riskhe mos naural reading o oo

big o ail in he sysemic-risk conexis ha he ailure o a giganic financial

insiuion will have immense effecs on he financial sysem or he economy as a

whole, simply because he firm is exremely large. Size in his conex is obviously

a proxy or imporance, albei an imperec one.5Large insiuions migh be able

o ail wihou harmul sysemwide effecs. Likewise, smaller insiuions ha are

cenral o he uncioning o he sysem migh ail wih disasrous consequences.

Bu objecions on hese grounds are largely a debaers poin. Te argumen is ha

size is a reasonable and relaively workable proxy or imporance.


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Interconnectedness-based systemic risk

Many argue ha BF should insead be called oo inerconneced o ail, a

descripion ha idenifies a differen kind o sysemic risk.6Te worry here is ha

an insiuion has oo many links o oher insiuions in he economy, such ha is

ailure would have negaive effecs hroughou each o hese firms and hus o hesysem as a whole. Tis orm o risk is ofen called conagion, as he disease in

one insiuion will spread o ohers wih which i ineracs.7For example, i firm A

is engaged in risky behavior and ails, i may no be able o ulfill is conracs wih

firms B and C, each o which hen ail, affecing firms D and E, wih whom hey

work, and so on. Tis cascade effec ripples hrough he economy.

O course, inerconnecedness is no limied o financial insiuions. Te bail-

ou o General Moors, or GM, in 2008 and 2009 was in par jusified by links

beween GM and is pars manuacurers, disribuors, and ohers in he auomo-

ive indusry.8Similarly, imagine he sysemic effecs o a hypoheical Wal-Marailure: Te firms connecions hroughou he consumer-goods indusry would

have significan effecs on major consumer-produc companies.

System effects and systemic risk

A variey o sysemic-risk issues also arise when muliple acors operae wihin a

single sysem wheher or no hey are inerconneced. Tree main concerns arise.

Te firs is inormaional.9I firm A ails, people may scruinize firm As risky prac-

ices, only o realize ha firm B has been engaged in he same pracices. I people

believe hose risky pracices led o ailure in firm A, hey may no longer wan o

work wih firm B because i engages in he same risky pracices. Te second con-

cern is ofen called common shock, defined as a siuaion in which a single exer-

nal even affecs muliple firms a once, leading o he ailure o he insiuions

simulaneously.10Te hird concern is he convenional noion o a panicha

he ailure o a BF firm will lead o widespread public panic ha undermines

muliple firms, regardless o he soundness o hose oher firms.11

One phenomenon ha migh undergird each o hese sysemic risks is he oo-many-o-ail concern, or so-called herd menaliy wihin he indusry.12Economiss

have shown ha when here are isolaed bank ailures, regulaors will allow oher

insiuions o acquire he ailing banks, bu when here are many simulaneous


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bank ailures, regulaors find i opimal o bail ou some or all o he ailing banks.

As a resul, smaller banks herd oward he policies o large banks o benefi rom

he bailou policy in he even o ailure. Tis alignmen means ha muliple bank

ailuresand, as a resul, bailousare more likely o occur a once.

Bailout concerns

Anoher common area o concern is axpayer bailous o ailing firms. Te worry is

ha he governmen will bail ou firms ha are seen as BF insead o leting hem

ail as he principle o creaive desrucion requires. Wheher explici or implici, a

policy o bailous skews incenives or firms and harms axpayers and markes as a

resul. Bailou recipiens can differmanagemen, shareholders, or crediorsbu

regardless, bailou concerns ocus on wo specific issues: moral hazard and cos.

Moral hazard

Firs is he idea ha bailous lead o a moral hazard.13BF firms know ha

hey can benefi rom governmen bailous in he even o saggering losses. As a

resul, i is raional or hem o ake on riskier behavior because hey will be able

o capure he profis while socializing he losses among axpayers. Te resul is

a sysem ha osers more and more risky behavior because he governmens

bailou policy has undermined he disciplining effecs o he downside risks ha

accompany marke paricipaion, such as losses, ailure, or acquisiion.

Bailout costs

Bailous also mean ha axpayers are on he hook or losses rom he risky bes o

privae acors. I bailous become a recurring pracice, i is no obvious ha his

will resul in financial reurns or he U.S. reasury. Bu even i he coss o bailous

are paid back o he reasury over ime, he pracice is roubling or boh moral

and pracical reasons. Morally, axpayers should no have o rescue hose financial

insiuions aking on risky aciviies ha have quesionable social valueinclud-ing giving bonuses or golden parachues o op execuives whose acions caused

heir insiuions ailure. Pracically, in a world o consrained resources, here

migh be opporuniy coss o spending money on bailous or he larges financial


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insiuions during a financial crisis, raher han on economic simulus policies or

pro-growh policies such as invesmen in inrasrucure or research and develop-

men. I Congress eels budgeary consrains, hen prioriizing bailous migh

mean ha oher imporan spending ges shor shrif.

Competition concerns

BF also includes a variey o concerns abou compeiion wihin he financial

indusry in which he bigges firms gain undue advanage over smaller firms. Large

firms ge an implici subsidy because he marke recognizes heir BF saus, and

big firms are also beter able o bear regulaory burdens.

Implicit subsidies

Jus as BF firms know hey can benefi rom bailous, oher marke acors can

also ideniy which firms are likely o be bailed ou, and hey will hereore rea

hose firms as effecively having governmen insurance.14Te resul is a skewing

o he marke: BF firms have a compeiive advanage over oher firms because

hey have a no-cos governmen insurance policy guaraneeing agains losses,

paricularly or he risky aciviies ha migh ge a high reurn.

Te consequence is ha marke discipline will no be as effecive agains he

BF firms.15Te value o his implici insurance policy can be calculaed by

looking a he borrowing raes o differen firms, hough esimaes o he size o

he implici subsidy vary widely.16Some have even suggesed ha he larges Wall

Sree banks would no be profiable wihou he subsidy.17

Distribution of regulatory burdens

BF firms also benefi rom he governmens regulaory response o heir size.

Regulaory burdens are more difficul or small financial insiuions such as com-

muniy banks and credi unions o bear han or he larges firms because smallfirms do no have he same level o financial and personnel resources o devoe

o regulaory compliance. Te Independen Communiy Bankers o America in

paricular has argued ha regulaions designed or he larges banks have affeced

heir members adversely.18Tis design o responsive regulaion makes he playing

field in he financial indusry uneven and biased oward larger insiuions.


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Firm-level concerns

Many who are concerned abou BF are worried abou he effecs ha large

size has wihinfirms, paricularly wih respec o inernal discipline on firm

behavior. In oher words, BF firms migh urn ou o be oo big o manage.19

Specifically, he concern is ha in large firms wih muliple divisions and complexsrucures and pracices, managemen will have a harder ime conrolling and

overseeing he firms operaions. Commenaors have suggesed his phenom-

enon migh have been a work in a variey o recen scandals: JPMorgans London

Whale case, HSBC and Sandard Charereds exensive money laundering and

sancions violaions, raudulen morgage pracices, and LIBOR manipulaion.20

While he ailure o inernal conrols migh be a uncion o sheer size and

complexiy, i migh also be a uncion o he BF implici guaranee.21On his

heory, BF firms deliberaely engage less sringen inernal conrols because

hey know hey have an implici governmen guaranee in he even ha riskyaciviies go awry.

Political-control concerns

In addiion o marke discipline and inernal conrols, firms are subjec o exernal

conrol via governmen regulaion. However, he growh o financial insiuions

migh weaken he effeciveness o poliical conrols on firms and skew he abiliy

o governmen o respond o economic crises.

Regulatory concerns

As a mater o regular oversigh, BF firms migh be oo big o regulae

because heir sheer size and complexiy makes i difficul or governmen regu-

laors o do heir jobs.22Tis is problemaic boh or he public and or firms.

Inernally, supervisors who canno undersand or monior firm aciviies hrough

normal supervisory pracices will be unable o preven poor behavior beore

somehing bad acually happens.23

A he same ime, regulaors designing he rulesand guidance or hese complex and dynamic aciviies will have rouble drawing

up regulaions ha align wih pracices on he ground. Te resul migh be ha

regulaions hemselves become exremely complicaed and convolued, requiring

firms o go o grea lenghs in heir compliance effors.24In oher words, BF

migh make supervision harder, lead o a disconnec beween regulaion and real-

iy, and increase regulaory complexiy.


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Legal accountability

Afer a crash or afer an illegal acion, BF migh also undermine he abiliy o

he U.S. Deparmen o Jusice o punish bad acors and firms. Tis phenomenon

is known as oo big o prosecue, oo big or rial, or oo big o jail, and has

been condemned across he poliical specrum.25

When asked abou he ac ha neiher HSBC nor any o is employees were

prosecued or years o sancions violaions and money laundering,26Atorney

General Eric Holder noed ha he size o some o hese insiuions becomes so

large ha i does become difficul or us o prosecue hem when we are hi wih

indicaions ha i we do prosecuei we do bring a criminal chargei will have

a negaive impac on he naional economy, perhaps even he world economy.27

In oher words, afer-he-ac legal conrols and ramificaions on bad behavior

migh be ineffecive agains BF firms because he U.S. Deparmen o Jusice isworried abou he effecs on he economy o enorcing he law.

Political influence and capture

Te size o financial insiuions migh also give hem ousized influence over he

poliical and regulaory process more broadlycommonly called poliical, regula-

ory, or cogniive capure. Under poliical capure, firms have ousized influence over

congressional aciviy by virue o being able o conribue o legislaors campaigns

and spend greaer resources on lobbying.28Wall Sree, or example, spen more han

$1 million a day on lobbying during he lead up o he Dodd-Frank Ac.29

Regulaory capure is similar, bu operaes via he firms influencing regulaors,

eiher hrough he revolving door beween regulaors and firms or hrough

lobbying effors a he agency level. Cogniive, or episemic, capure is more

suble: BF firms can shape he views o individuals wihin he poliical and

regulaory process by shared educaional and culural experiences in which

regulaors hemselves come o believe ha he BF firms perspecive on an

issue is opimal even hough an unbiased assessmen would come o a differenconclusion.30Even academics and inellecuals can be capured cogniively


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and indeed, hey are someimes arges or capure. Size, when coupled wih

complexiy, increases capure concerns. In a ragmened financial indusry, firms

wihin differen segmens o he indusry may have differen policy preer-

ences, enabling regulaors o divide he indusry and evade capure.31When he

indusry is no ragmened because BF firms dominae in muliple segmens,

regulaors have a harder ime playing firms agains each oher, and capurebecomes more likely.


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Reforming too big to fail

Commenaors have suggesed a wide range o opions o address BF and he

problem o big financial insiuions. Reormers debae bankrupcy and resoluion

mechanisms, size caps, a new Glass-Seagall Ac, he Volcker Rule, inernal con-

rols, and prudenial regulaions, among oher opions. Sudies have been writen

on all o hese reorms, wih commenaors debaing each in exreme deail.

Despie he high-qualiy debae a he echnical level, he poliical and policy

debae ofen suffers rom commenaors no connecing he problem o besolved wih he soluions ha migh acually address he problem. For example,

commenaors ofen claim ha a new Glass-Seagall Ac would no pu an end

o big insiuions and he original acs repeal in 1999 was in ac no he cause

o he financial crash in 2008.32Whaever he meris o hose asserions, sup-

porers o a new Glass-Seagall Ac do no solely, or even mosly, rely on hose

argumens. Tey insead argue ha he principle behind he law was separaing

financial uncions o limi he inerconnecedness o financial pracices and

poenial conflics o ineres.33

o make progress in he debae over reorm, we need o undersand he main ca-

egories o soluions and hen connec hose soluions o he concerns hey address.

Approaches to reform

Some o he bigges differences in policy reorms are on he undamenal

approach o reorm: Should i be ex ane or ex pos? Should i be srucural or

echnocraic? Each o hese is explored in deail below.


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Ex ante versus ex post34

Ex-ane reorms are policies ha are acivaed beore an undesirable even akes

place. Tey are prevenive in naure, hoping o sop bad conduc or he subsequen

effecs beore hey happen. Ex-pos reorms are policies ha are acivaed only

afer an undesirable even occurs. Teir purpose can be o punish bad acors, omiigae ill effecs, or o creae incenives ha will deer bad or risky conducin

ac, in his later sense, ex-pos acions can have ex-ane effecs. For example, bank

supervision over money laundering is an ex-ane policy, while prosecuion or

money launderers is an ex-pos policy. Similarly, he heory behind capial require-

mens is ha hey are an ex-ane way o preven bank ailures because unding

a proporion o a cerain asse by equiy insead o deb should make losses less

problemaic. Bu he heory behind resoluion is ha banks sill migh ail, and

here mus be a process in place or addressing such ailures.

Te grea benefi o ex-ane reorms is ha hey direcly atemp o preven he illeffecs o BF in he firs place. Tis is paricularly imporan because in some

areas, ex-ane reorms migh be he only way o address he underlying concerns.

For example, here is a srong argumen ha he bailou, moral hazard, and

implici subsidy concerns wih BF are primarily sociological and psychologi-

cal, no legal or regulaory. Ta is, hey are based on peoples belie ha big firms

will be bailed ou i hey ail.35I ha is rue, hen removing he governmens legal

auhoriy o bail ou big banks or insiuing bankrupcy proceedings migh be

helpul. Bu even i ha were o happen, people migh sill believe ha in a serious

crisis, regardless o he exising laws, Congress or he execuive branch would

auhorize a bailou. An implici bailou policy would hereore sill exis. Te

cenral drawback o ex-ane reorm is ha i migh no solve he problem. Even

wih prophylacic rules, illegal aciviy or risky aciviy migh sill ake place. Firms

migh sill ail. In ha case, ex-pos rules will be necessary.

Structural versus technocratic reforms

Srucural reorms seek o make undamenal changes o he srucure o he finan-

cial indusry. For example, proposals o cap he size o financial insiuions andGlass-Seagall-syle separaion o uncions are srucural reorms. echnocraic

reorms keep he basic srucure o he financial sysem inac bu seek o miigae

harmul effecs by changing rules or policies in incremenal or moderae ways.

Tey also assume ha exper regulaors and bureaucras can use policy o creae

incenives or firms o ac legally or ha exper regulaors and bureaucras can

hemselves manage and monior aciviy o preven bad consequences.


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echnocraic reorms benefi rom being incremenal, and in heory, hey should

be less poliically conroversial. However, hey suffer rom heir reliance on an

opimisic view o regulaors and policymakersand rom complexiy. For ech-

nocraic reorms o work, exper regulaors mus be able o manage he dynamic

changes in markes on an ongoing basis. As a corollary, such reorms are more likely

o be echnical and specific o a cerain conex. Srucural reorms benefi rom noputing so much aih in regulaors and as a resul are likely o be simpler.

Reform policies

Proposals or addressing BF are ubiquious. Te goal here is no o explore each

proposal in deailsomehing ha scholars, commenaors, indusry paricipans,

and regulaors have doneor o ideniy every specific proposal or variaion on

a proposal. Raher, he goal is o ideniy he main caegories o reorms, discuss

some o heir shared characerisics, and ideniy he concerns ha hey address.

Resolution

A variey o reorms can be grouped ogeher as resoluion: bankrupcy; orderly

liquidaion auhoriy, or OLA; living wills; and Federal Deposi Insurance

Corporaion, or FDIC, resoluion.36While here are many differences beween

hese policies, hey share imporan similariies. Tese processes seek o provide

an orderly resoluion o he insiuions lie and operaions, hus conribuing o

marke confidence.37Tey also aspire o creae incenives o change behavior: A

well-developed process or resoluion shouldin heorymake bailous less

credible as a policy soluion because resoluion is more easily available.38As a

resul, big financial insiuions should change heir operaions o avoid aciviies

ha migh resul in ailure.

As a caegory, resoluion is an ex-pos echnocraic reorm designed o address

bailous, moral hazard problems, and implici subsidies. o be sure, all resolu-

ion policies have ex-ane effecs by changing ex-pos pracices. Some migh also

caegorize living wills as an ex-ane policy because he work o wriing he willakes place beore he firm is in rouble.39In any even, by making ailure more

plausible, resoluion hopes o make bailous, moral hazard, and implici subsidies

less likely. Resoluion does no direcly address firm-level concerns or poliical-

conrol concerns, bu i migh indirecly address boh by giving firms an ineres


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in changing heir pracices and by making governmen acors less earul o he

oo big o jail phenomenon. In addiion, resoluion migh help alleviae cerain

sysemic risks. On he one hand, resoluion miigaes sysemic risk because mar-

ke acors know here is a reliable process in he even o a firms ailure, which in

urn should reduce he risk o conagion. However, some have argued ha in he

even o muliple simulaneous ailures, i is unlikely he governmen will pu allailing firms hrough a resoluion process because o he insabiliy ha would

creae in he financial sysem.40

Size caps

Some have proposed capping he size o he larges financial insiuionsan

ex-ane, srucural reorm designed o end BF alogeher.41Puting aside he

implemenaion quesionshow o measure size and where o se he caphis

approach seeks o address a variey o concerns wih size. Mos direcly, i aimso end BFs moral hazard, bailou, and implici subsidy problems hrough an

ex-ane srucural approach. I no firms are big enough o jeopardize he economy

upon ailure, hen here would be no need or bailous and no moral hazard or

implici subsidy.

Size caps address he size-based sysemic-risk problem, and hey also miigae

some o he concerns abou oo big o manage, regulaory ailures, and legal

accounabiliy. In smaller firms, managers should have an easier ime implemen-

ing inernal conrols and oversigh, and regulaors should have an easier ime

supervising aciviies. Prosecuors will also be less likely o ear prosecuing

smaller-sized firms because he risk o he sysem would be reduced.

Te downside o size caps is ha hey do no address concerns semming rom iner-

connecedness and complexiy. Smaller firms migh sill be inerconneced, such

ha he ailure o one influences he financial sysem as a whole. Similarly, complex-

iy wihin firms migh make i difficul or managers and regulaors o supervise firm

aciviies. A he same ime, scholars have argued ha size caps migh miigae he

sysemic risk o inormaion effecs. Wih more firms, he ollow-he-leader effec

should diminish, creaing diversiy wihin financial firm pracices.42


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Glass-Steagall

A number o proposals can be grouped ogeher under he rubric o Glass-

Seagall: reurning o Glass-Seagall, a new Glass-Seagall,43ring encing,44and he

Volcker Rule.45Despie requen commenary, here is a grea deal o conusion

abou hese proposals. Te cenral principle underlying all o hem is ha differenkinds o aciviy should ake place in differen financial insiuions.

Te Glass-Seagall regimewhich included he 1933 Banking Ac and he Bank

Holding Company Ac o 1956orced he separaion o hree ypes o financial

services: deposiory insiuions, invesmen banking, and insurance underwri-

ing. Calls or a new Glass-Seagall are no ocused solely on reurning o he old

regimes delineaions, bu are inspired by he underlying idea o separaing di-

eren financial aciviies rom one anoher.46Boh ring encing and he Volcker

Rule are weaker versions o his renewed concep o separaion. Te Volcker Rule

separaes ewer aciviies, limiing banks and heir affiliaes rom propriearyrading. Ring encing addresses many aciviies bu does no ully separae hem,

relying insead on walls withineach insiuion beween he differen aciviies.

Tese proposals are all ex ane and srucural, hough he Volcker Rule is argu-

ably ex ane and echnocraic.

Funcional separaion deals wih he inerconnecedness and complexiy o he

financial indusry. By separaing aciviies ino differen insiuions, separaion

should make individual insiuions ar less complicaed, enabling managers o

implemen beter inernal conrols and regulaors o supervise aciviies. I also

creaes ragmenaion wihin he financial secor, which may reduce poliical or

regulaory capure. While some orms o sysemic risk such as conagion are likely

o exis even wih separaionbecause, or example, firms in differen secors may

have conracs wih each oherseparaion does miigae oher orms o sysemic

risk. Panics and inormaional issues, or example, are more likely o be confined

o a specific secor. O course, uncional differeniaion canno guaranee sound

pracices: Lehman Brohers was no a conglomerae on he scale o Ciigroup

when i ailed in 2008. Sill, he inerconnecedness risks a Ciigroup, or exam-

ple, remain so significan ha wo o is ormer leaders have called or breaking up

he insiuion wih Glass-Seagall-like separaion.47

In addiion, separaion makesi less likely ha a paricular firm will ail due o risky aciviies rooed in inernal

complexiy and cross-subsidizaion wihin he firm.


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Separaion indirecly addresses oher concerns as well. Separaion o big, complex

financial insiuions would resul in breaking hem up along uncional lines,

creaing smaller insiuions. O course, separaion does no address size com-

pleelyone can imagine Bank o America spinning off is deposiory business

and i remaining exremely large. In addiion, separaion indirecly addresses bail-

ous, moral hazard, and subsidies. Separaion migh lead o a change in he culureo risk-aking in differen secors.48I also enables differen reamen or differen

secors: Some insiuions, such as deposiories, could be given a public insurance

program as he FDIC currenly does, and ohers, such as hedge unds, could be

denied any explici or implici bailou or insurance. Wih separaion, boh culure

and policy may make bailous, moral hazard, and implici subsidies less likely.

Prudential regulation

Anoher caegory o BF remedies can be reerred o as prudenial regulaion.Prudenial regulaion is he archeype o ex-ane echnocraic policy. I assumes

ha regulaors can insiue policies ha will manage risk wihin firms, known

as microprudenial regulaion, or wihin he economic sysem, reerred o as

macroprudenial regulaion.

I is helpul o urher divide microprudenial regulaion ino wo caegories: super-

vision and regulaion. Supervision involves governmen supervisors monioring

aciviies rom wihin financial insiuions, while regulaion involves governmen

esablishing rules, sandards, and guidance on permissible firm aciviies. Te mos

prominen microprudenial policies are capial requiremens, including leverage

raios and coningen capial requiremens, and liquidiy requiremens, boh o

which require echnical judgmen in seting he proper levels o adequaely manage

risk.49Some commenaors have advocaed or greaer reliance on equiy finance

because i effecively means sel-insurance or financial insiuions, changes heir

behavior oward risk, and is no socially cosly.50Macroprudenial regulaion ofen

uses he same ools bu i is ocused more on addressing sysemwide risk han

insiuion-specific risk. Te creaion o he Financial Sabiliy Oversigh Council,

or FSOC, is he resul o a belie ha regulaors can do beter han hey have in he

pas wih respec o macroprudenial monioring and regulaion.

Te cenral jusificaion or prudenial regulaions is ha hey improve he saey

and soundness o financial insiuions, prevening hem rom ailing in he firs

place. A second benefi is ha hey reduce moral hazardand in he process

should reduce he cos o bailous i hey are necessary.51Prudenial regulaion


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should make firms less likely o ake on large amouns o risky behavior, which

should also improve execuives conrol over firm aciviies. In a sense, his

reduced risk rom firm bes going bad alleviaes some o he burdens on regulaory

supervision because he limied consequences mean supervisors have less o be

worried abou. Prudenial regulaion migh also address cerain orms o sys-

emic risk, including he effecs o panics because, or example, insiuions wouldmainain more capial or have greaer liquidiy. Finally, many argue ha prudenial

regulaion such as leverage requiremens should lead o smaller financial insiu-

ions, as banks will be encouraged o sell heir mos risky asses.52

Te drawbacks o prudenial regulaion are less requenly discussed. Foremos,

prudenial regulaion is exremely cosly, complex, and inensive. I requires a grea

deal o effor by exper bureaucras o design regulaory policies and o keep up wih

hem as he marke changes. For hose skepical o he abiliy o civil servans o

oversee he financial secor, prudenial regulaion may hereore be problemaic. In

addiion, prudenial regulaion risks regulaory capure. In order o design complexregulaions ha grapple wih he dynamic and varied aciviies aking place in he

financial markes, regulaors are more likely o need experience working in he regu-

laed indusry. Tis increases he likelihood o cogniive capure among regulaors.

Fees and taxes

Some have called or imposing ees or axes on he bigges financial insiuions. Fees

and axes are an ex-ane echnocraic approach o reorming bigness. Some propos-

als ake aim a implici subsidies, moral hazard, and bailous. Tey compare he

banks implici subsidy o a ree governmen insurance plan, and hey seek o have

he banks inernalize he cos or ha insurance.53Fees or axes could also ac as a

way o pay or a possible bailou und in he even ha bailous are necessary. aking

a more comprehensive approach, ees or axes could be used o require large finan-

cial insiuions o inernalize he ull coss o heir aciviies, poenially including

los gross domesic produc, or GDP, and effecs o unemploymen, among oher

social coss.54Ohers argue ha a ax on he size o financial insiuions will help cu

he bigges banks down o size, addressing size-based sysemic risk.55

Fees and axes suffer rom a number o echnical challenges, in paricular how o

deermine he amoun o he ee or ax. Bu hey also exend o a broader issue:

Do we wan o pu a price on he underlying aciviy? A se ee or ax would

enable financial insiuions ha are willing o pay o coninue engaging in he


19/26


underlying risky behavior. As a sociey, we may simply preer ha he risky aciv-

iy, even i compensaed by a ee, does no ake place a alland his may be

paricularly rue i he ee or ax does no accoun or all he indirec coss, such

as employmen losses, o firm ailure o he economy.

Internal controls

Some hink ha insiuing beter inernal conrols wihin financial insiuions

could help address he riskiness o firm behavior and ha firm managemen can be

incenivized o adop more sringen conrols. Te mos prominen inernal con-

rol mechanisms are regulaing pay o he CEO, execuives, or bankers, requiring

execuive cerificaions, and regulaing risk-managemen commitees.

Scholars have argued ha compensaion is ofen ied o shor-erm resuls and is re-

quenly srucured so ha bankers ge compensaion ha is linked o gains bu insu-laed rom lossesmeaning hey are paid highly i all goes well, bu are also paid well

i hings go wrong.56I compensaion srucures are regulaed, he regulaions could

creae incenives or execuives o ensure he bank is engaged in less risky behavior.

Execuive cerificaions use psychological and legal ools insead o economic incen-

ives, requiring execuives o ceriy ha aciviies are legal and ha conrols are in

place. Advocaes argue ha hese cerificaions make i more likely he execuive

will eel responsible or he cerified aciviy because he or she is affixing his or her

name o documens atesing o he legaliy o he aciviy. As a resul, he execuive

should eel obligaed o impose more sringen inernal conrols.57Cerificaions are

a eaure o he Sarbanes-Oxley Ac and Volcker Rule regulaion, and hey have been

suggesed in oher conexs as well.58Finally, pursuan o he Dodd-Frank Ac, he

Federal Reserve has recenly issued rules relaing o risk-managemen commitees

wihin financial insiuions.59Tese rules are designed o srucure inernal manage-

men sysems in a manner ha will preven excessive risk-aking.

Incenives o creae more sringen inernal conrols are ex-ane echnocraic

policies ha direcly address he firm-level concerns wih size. Greaer inernal

conrols should give managemen a beter handle on he aciviies aking place in

heir firms, and regulaors should have an easier ime supervising firm aciviies asa resul. Inernal conrols migh also miigae concerns abou legal accounabiliy,

as cerificaions and pay incenives should push execuives o implemen policies

ha improve legal compliance. In addiion, inernal conrols indirecly affec he

riskiness o firm aciviies, which may comba he inormaional version o sysemic


20/26


risk. Recall ha under his version o sysemic risk, he ailure o firm A unveils

inormaion abou pracices wihin firm A, which when discovered o exis in firms

B and C, migh lead o hose oher firms ailure. Inernal conrols, in heory, should

make i more likely ha firms B and C have differenha is, less riskypracices.

Te problems wih inernal conrols are readily visible. Firs, hese mechanismsdo no direcly conron he risky pracices hemselves. Raher, hey rely on

incenives and decision-making processes such as risk commitees. Te resul

is ha hese mehods migh no be erribly effecive. Managers hosile o

inernal-conrol mechanisms migh no ake conrols seriously. For example,

in a complex financial insiuion, execuives migh jus sign off on cerifica-

ions, knowing hey will be penalized legally or via public opinion, regardless

o he level o inernal conrols hey develop in he company. In addiion, hese

approaches do no address mos o he cenral concerns wih BF: sysemic

risk, bailous, implici subsidies, and poliical capure.


21/26


Conclusion

Te concerns wih big financial insiuions are varied, ranging rom bailous and

implici subsidies o sysemic risk o poliical, regulaory, and legal capure. Te

bes soluion or soluions o adop will depend largely on which concerns are

mos a issue. O course, differen people will come o differen conclusions on

how roubling each o he concerns wih BF are, and policymakers will here-

ore preer differen soluions. Bu he firs sep is ideniying why BF is bad

or our financial sysem and he economy as a wholeand hen oulining how o

address hose specific concerns.

TABLE 1

Linking problems and solutions in the TBTF debate

ResolutionCap

the size

Glass-

Steagall

Fees

and taxes

Internal

controls

Prudential

regulation

Moral hazard

Bailout costs

Implicit subsidy

Regulatory playing field

Size-systemic risk

Interconnected-systemic

risk

System effects- systemic

risk

Firm-level concerns

Regulatory challenges

Legal accountability

Political and regulatory

capture

Ex ante

Ex post

Structural

Technocratic

= Directly addresses issue = Indirectly or partly addresses issue


22/26


About the author

Ganesh Sitaramanis a Senior Fellow at the Center for American Progress and an

assistant professor of law at Vanderbilt Law School. From 2011 to 2013, he served as

policy director for the Elizabeth Warren for Senate campaign and senior counsel to Sen.

Elizabeth Warren (D-MA). Prior to Warrens successful Senate bid, Sitaraman servedas an advisor to Warren when she was chair of the Congressional Oversight Panel for

the Troubled Asset Relief Program, or TARP.


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Endnotes

1 Dodd-Frank Wall Street Reform and Consumer Protec-tion Act, Public Law 203, 111th Cong. (July 21, 2010),13762223.

2 Stephen Gandel, By every measure, the big banksare bigger,Fortune, September 13, 2013, available at

http://finance.fortune.cnn.com/2013/09/13/too-big-to-fail-banks/.

3 Louise C. Bennetts, Too Big to Fail Is a Distraction,American Banker, March 6, 2013, available at http://www.americanbanker.com/bankthink/too-big-to-fail-is-a-distraction-1057258-1.html.

4 Steven L. Schwarcz, Systemic Risk,Georgetown LawJournal 97 (1) (2008). For a review of the definitionsof systemic risk, see Adam J. Levitin, In Defense ofBailouts, Georgetown Law Journal99 (2011): 435514.

5 James Kwak, Treasury and the Blogs, The BaselineScenario, November 6, 2009, available at http://baseli-nescenario.com/2009/11/06/treasury-and-the-blogs/;Levitin, In Defense of Bailouts, p. 452; Jerome H. Pow-ell, Ending Too Big to Fail, Speech to the I nternationalBankers 2013 Washington Conference, Washington,

D.C., March 4, 2013, available at http://www.federalre-serve.gov/newsevents/speech/powell20130304a.htm.

6 Alice M. Rivlin, Systemic Risk and the Role of the Fed-eral Reserve (Washington: Pew Task Force on EconomicReform, 2009), available at http://www.brookings.edu/~/media/Research/Files/Reports/2009/7/29%20systemic%20risk%20rivlin/0729_systemic_risk_rivlin.PDF; Sheri Markose, Too Interconnected to Fail,Presentation to IMF Workshop on OperationalizingSystemic Risk Monitoring, May 2628, 2010, available athttp://www.imf.org/external/np/seminars/eng/2010/mcm/pdf/SMarkose.pdf.

7 Jeffrey N. Gordon and Christopher Muller, ConfrontingFinancial Crisis: Dodd-Franks Dangers and the Case fora Systemic Emergency Insurance Fund, Yale Journal onRegulation28 (1) (2011); Levitin, In Defense of Bailouts,p. 455.

8 President Barack Obama, Remarks by the President onthe American Automotive I ndustry, March 30, 2 009,available at http://www.whitehouse.gov/the-press-office/remarks-president-american-automotive-indus-try-33009.

9 Gordon and Muller, Confronting Financial Crisis, p.160; Levitin, In Defense of Bailouts,p. 458; Jonathan R.Macey and James P. Holdcroft, Failure Is an Option: AnErsatz-Antitrust Approach to Financial Regulation, TheYale Law Journal120 (6) (2011): 12781589.

10 Levitin, In Defense of Bailouts, p. 460.

11 Daniel Tarullo, Confronting Too Big to Fail, Speechat the Exchequer Club, Washington, D.C., October 21,2009, available at http://www.federalreserve.gov/newsevents/speech/tarullo20091021a.htm.

12 Viral V. Acharya and Tanju Yorulmazer, Too many tofailAn analysis of time-inconsistency in bank closurepolicies,Journal of Financial Intermediation16 (2007):131, available at http://iiw.uni-bonn.de/semin-are/2011/regulierung/unterlagen/Thema%201.6%20Acharya,%20Yorulmazer%20%282007%29.pdf.

13 Levitin, In Defense of Bailouts, pp. 489490; ThomasM. Hoenig, Financial Reform: Post Crisis?, Speech atWomen in Housing and Finance, Washington D.C., Feb-ruary 23, 2011, available at http://www.kansascityfed.org/publicat/speeches/hoenig-DC-Women-Housing-Finance-2-23-11.pdf.

14 Levitin, In Defense of Bailouts, p. 490; Hoenig, Finan-cial Reform, p. 5.

15 Richard Fisher, Ending Too Big to Fail: A Proposal forReform Before Its Too Late, Speech to the Committeefor the Republic, Washington, D.C., January 16, 2013,available at http://www.dallasfed.org/news/speeches/fisher/2013/fs130116.cfm; Sheila C. Bair, We Must Re-solve to End Too Big to Fail, Speech to the 47th AnnualConference on Bank Structure and Competition of theFederal Reserve Bank of Chicago, May 5, 2011, avail-able at https://www.fdic.gov/news/news/speeches/archives/2011/spmay0511.html.

16 Federal Deposit Insurance Corporation, TBTF Subsidyfor Large BanksLiterature Review (2014), available athttp://www.fdic.gov/news/news/speeches/literature-review.pdf; I nternational Monetary Fund, Global

Financial Stability Report: Moving from Liquidity- toGrowth-Driven Markets (2014), available at http://www.imf.org/External/Pubs/FT/GFSR/2014/01/pdf/text.pdf.

17 Matthew C. Klein, How Our Big Banks Really Make theirMoney, BloombergView, March 31, 2014, available athttp://www.bloombergview.com/articles/2014-03-31/how-our-big-banks-really-make-their-money.

18 Independent Community Bankers of America, EndToo-Big-to-Fail (2013), available at http://www.icba.org/files/ICBASites/PDFs/EndTBTFStudy.pdf.

19 Ben W. Heineman, Jr., Too Big to Manage: JP Morganand the Mega Banks, Harvard Business Review, Octo-ber 3, 2013, available at http://blogs.hbr.org/2013/10/too-big-to-manage-jp-morgan-and-the-mega-banks/;Richard W. Fisher and Harvey Rosenblum, How Huge

Banks Threaten the Economy, The Wall Street Journal,April 4, 2012, available at http://online.wsj.com/news/articles/SB10001424052702303816504577312110821340648; Central Banker, The Big Banks: Too Complex toManage?, Winter 2012, available at http://www.stlouis-fed.org/publications/cb/articles/?id=2328; Julian Birkin-shaw and Suzanne Heywood, Too Big to Manage?, TheWall Street Journal, October 26, 2009, available at http://online.wsj.com/news/articles/SB10001424052970203585004574392673999432000.

20 Heineman, Too Big to Manage.

21 Fisher, Ending Too Big to Fail.

22 Sherrod Brown, Lets Keep Banks from Growing TooBig to Regulate, The Washington Post, April 30, 2010,available at http://www.washingtonpost.com/wp-dyn/content/article/2010/04/29/AR2010042902358.html.

23 Fisher and Rosenblum, How Huge Banks Threatenthe Economy; Thomas M. Hoenig and Charles S.Morris, Restructuring the Banking System to ImproveSafety and Soundness Testimony before the SenateCommittee on Banking, Housing, and Urban Affairs,May 9, 2012, available at http://www.fdic.gov/about/learn/board/hoenig/Restructuring-the-Banking-System,Hoenig,Morris,Nov.2013.pdf.


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24 Karen Petrou, A New Framework for Systemic FinancialRegulation (Washington: Federal Financial AnalyticsInc., 2011), available at http://www.fedfin.com/images/stories/client_reports/complexityriskpaper.pdf; Hoenigand Morris, Restructuring the Banking System toImprove Safety and Soundness, p. 19.

25 Mark A. Calabria and Lisa Gilbert, Are Banks Too Big toJail?, Cato Institute, January 6, 2014, available at http://www.cato.org/publications/commentary/are-banks-too-big-jail.

26 For a discussion of this issue, see Matt Taibbi, GangsterBankers: Too Big to Jail, Rolling Stone, February 14,2013, available at http://www.rollingstone.com/poli-tics/news/gangster-bankers-too-big-to-jail-20130214;

The Economist, Too Big to Jail, December 15, 2012,available at http://www.economist.com/news/finance-and-economics/21568403-two-big-british-banks-reach-controversial-settlements-too-big-jail.

27 Eric Holder, Testimony before the Senate JudiciaryCommittee, March 6, 2013, available at http://www.americanbanker.com/issues/178_45/transcript-attor-ney-general-eric-holder-on-too-big-to-jail-1057295-1.html. Holder later backtracked: Jason M. Breslow, EricHolder Backtracks Remarks on Too Big To Jail, Front-line, May 16, 2013, available at http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/untouchables/eric-holder-backtracks-remarks-on-too-big-to-jail/. Similarly, Assistant Attorney General

Lanny Breuer commented in a 2012 speech that hetakes into account the effect a prosecution might haveon shareholders, markets, or the economy as a whole.See Lanny A. Breuer, Speech to the New York City BarAssociation, September 13, 2012, available at http://www.justice.gov/criminal/pr/speeches/2012/crm-speech-1209131.html.

28 Simon Johnson and James Kwak, 13 Bankers: The WallStreet Takeover and the Next Financial Meltdown(NewYork: Pantheon Books, 2010).

29 Kevin Connor, Big Bank Takeover: How Too-Big-to-Fails Army of Lobbyists Has Captured Washington(Washington: Institute for Americas Future, 2011), avail-able at http://public-accountability.org/wp-content/uploads/2011/09/big-bank-takeover-final.pdf.

30 Simon Johnson, Too Politically Connected to Fail in

Any Crisis, The Baseline Scenario, October 8, 2009,available at http://baselinescenario.com/2009/10/08/too-politically-connected-to-fail-in-any-crisis/; Gordonand Muller, Confronting Financial Crisis, p. 178. Fora discussion of cultural capture, see David FreemanEngstrom, Corralling Capture, Harvard Journal of Lawand Public Policy36 (1) (2012): 3139.

31 Adam J. Levitin, The Politics of Financial Regulationand the Regulation of Financial Politics, Harvard LawReview127 (7) (2014): 19922067.

32 Bennetts, Too Big to Fail Is a Distraction; Nin-HaiTseng, A new Glass Steagall Wont Prevent AnotherFinancial Crisis, Fortune, July 15, 2013, available athttp://finance.fortune.cnn.com/2013/07/15/glass-stea-gall-elizabeth-warren/; Steven Pearlstein, Shatteringthe Glass-Steagall Myth, The Washington Post, July 28,2012, available at http://www.washingtonpost.com/

lets-shatter-the-myth-on-glass-steagall/2012/07/27/gJQASaOAGX_story.html.

33 21st Century Glass-Steagall Act of 2013, S. 1282, 113Cong. 1 sess. (Government Printing Office, 2013), avail-able at http://www.warren.senate.gov/files/documents/21stCenturyGlassSteagall.pdf; Thomas M. Hoenig,Back to the Business of Banking, Speech to the 29thAnnual Monetary and Trade Conference of the GlobalInterdependence Center and Drexel University LeBowCollege of Business, May 24, 2011, available at http://www.kansascityfed.org/publicat/speeches/Hoenig-MonetaryandTradeConference-05-24-11.pdf. See alsoJulie A.D. Manasfi, Systemic Risk and Dodd-FranksVolcker Rule, William & Mary Business Law Review4 (1)

(2013): 181212.

34 For a helpful discussion of ex ante and ex post reformsin the financial context, see Steven L. Schwarcz,Keynote Address: Ex Ante Versus Ex Post Approachesto Financial Regulation, Chapman Law Review15 (1)(2011): 257269.

35 Levitin, In Defense of Bailouts; Powell, Ending Too Bigto Fail.; Satya Thallam, Reconsidering Too Big to Fail(Washington: American Action Forum, 2014), availableat http://americanactionforum.org/uploads/files/re-search/AAF_too_big_to_fail.pdf.

36 For an overview, see Levitin, In Defense of Bailouts, pp.478, 48389; Gordon and Muller, Confronting FinancialCrisis, pp. 18593.


38 Levitin, In Defense of Bailouts,p. 467.

39 For a helpful overview of the difference betweenDodd-Frank Title I (living will) and Title II (resolution)authorities, see Thomas Hoenig, Can We End FinancialBailouts? Speech to the Boston Economic Club, May7, 2014, available at http://www.fdic.gov/news/news/speeches/spmay0714.html.

40 Gordon and Muller, Confronting Financial Crisis,pp.15354.

41 Brown-Kauffman Amendment of 2010, S2765, SA 3733,111 Cong., (Government Printing Office, 2010), avail-able at https://beta.congress.gov/crec/2010/04/28/CREC-2010-04-28-pt1-PgS2765.pdf; Macey and Hold-croft, Failure Is an Option.

42 Macey and Holdcroft, Failure Is an Option,pp.13831384.

43 21st Century Glass-Steagall Act of 2013.

44 Independent Commission on Banking, InterimReport: Consulation on Reform Options (2011),available at http://webarchive.nationalarchives.gov.uk/20121204124254/http://www.hm-treasury.gov.uk/d/icb_interim_report_full_document.pdf; High -level Expert Group on Reforming the Structure of theEU Banking Sector, Final report (the Liikanen Report)(2012), available at http://ec.europa.eu/internal_mar-ket/bank/docs/high-level_expert_group/report_en.pdf.

45 Dodd-Frank Wall Street Reform and Consumer ProtectionAct, Public Law 203, 111th Cong., (July 21, 2010) 619(codified at 12 U.S.C. 1851).

46 Hoenig, Back to the Business of Banking; Thomas M.Hoenig, Do SIFIs have a Future?, Speech to conferenceDodd-Frank One Year On, Pew Financial Reform Proj-ect and New York University Stern School of Business,June 27, 2011.


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47 John Reed, Ex-Citi CEO John Reed: We Need ToBreak Up The Big Banks, Huffington Post, Sep-tember 9, 2013, available at http://www.huffing-tonpost.com/2013/09/09/john-reed-break-up-banks_n_3893687.html; Michael J. De la Merced, WeillCalls for Splitting Up Big Banks, The New York Times,July 25, 2012, available at http://dealbook.nytimes.com/2012/07/25/weill-calls-for-splitting-up-big-banks/.

48 Andrew G. Haldane, On Being the Right Size, Speechto the Institute of Economic Affairs 22nd Annual Series,

The 2012 Beesley Lectures, October 25, 2012, available

at http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech615.pdf.

49 For a discussion of Dodd Franks prudential regulationrequirements, see Levitin, In Defense of Bailouts, pp.476477; Schwarcz, Systemic Risk, pp. 211-225; John C.Coffee Jr., Systemic Risk After Dodd Frank: ContingentCapital and the Need for Regulatory Strategies BeyondOversight, Columbia Law Review111 (795) (2011): 795847; Hal S. Scott, The Reduction of Systemic Risk in theUnited States Financial System, Harvard Journal of Law& Public Policy33 (2) (2010): 671734; For a discussionof contingent convertibles, see Charles W. Calomirisand Richard J. Herring, How to Design a ContingentConvertible Debt Requirement That Helps to Solve Our

Too Big to Fail Problem,Journal of Applied CorporateFinance 25 (2) (2013): 2144, available at http://fic.whar-ton.upenn.edu/fic/Policy%20page/25.Calomiris_forth-coming.pdf; Zeev Eiger, Frequently Asked Questions

about Contingent Capital (San Francisco: Morrison &Foerster, 2014), available at http://www.mofo.com/files/Uploads/Images/FAQs-Contingent-Capital.pdf.

50 Anat Admati and Martin Hellwig, The Bankers NewClothes: Whats Wrong with Banking and What to D oAbout It(Princeton, NJ: Princeton University Press,2013).

51 Tarullo, Confronting Too Big to Fail; Daniel Tarullo,Regulating Systemically Important Financial Firms,Speech at the Peter G. Peterson Institute for Interna-tional Economics, Washington, D.C., June 3, 2011, avail-able at http://www.federalreserve.gov/newsevents/speech/tarullo20110603a.htm.

52 Mayra Rodriguez Valladares, Why the Bank LeverageRatio Is Important, The New York Times, Febru-ary 28, 2014, available at http://dealbook.nytimes.

com/2014/02/28/why-the-bank-leverage-ratio-is-important/?_php=true&_type=blogs&_r=0.

53 For a discussion, see Levitin, In Defense of Bailouts,p. 473; Arthur E. Wilmarth, Jr., The Dodd-Frank Act: AFlawed and Inadequate Response to the Too-Big-To-FailProblem, Oregon Law Review 89 (3) (2011): 9511058.

54 Joseph E. Stiglitz, Too Big to Live, Project Syndi-cate, December 7, 2009, available at http://www.project-syndicate.org/commentary/too-big-to-live;Willem Buiter, Too Big to Fail Is Too Big, FinancialTimes, June 24, 2009, available at http://blogs.ft.com/maverecon/2009/06/too-big-to-fail-is-too-big/#axzz32RJ2nkQu.


56 Lucian A. Bebchuk and Holger Spamann, RegulatingBankers Pay, Georgetown Law Journal98 (2) (2010):247287; Sanjai Bhagat and Rober ta Romano, Reform-ing, Executive Compensation: Focusing and Commit-ting to the Long-Term, Yale Journal on Regulation26(2) (2009): 359372; Frederick Tung, Pay for BankerPerformance: Structuring Executive Compensationfor Risk Regulation, Working Paper 10-93 (EmoryUniversity School of Law, Public Law and Legal TheoryResearch Paper Series, 2010), available at http://ssrn.com/abstarct=1546229.

57 Merritt B. Fox, Required Disclosure and Corporate Gov-ernance, Law and Contemporary Problems62 (3) (1999):113127.

58 For an analysis of the requirements in Sarbanes-Oxley,see White & Case, LLP, Short Guide to CEO and CFOCertifications and Internal Control Reporting Under theSarbanes-Oxley Act (2003), available at http://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttach-ment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdf. For discussions onthe Volker Rule, see Sullivan & Cromwell, LLP, VolckerRule (2014), available at http://www.sullcrom.com/siteFiles/Publications/SC_Publication_Volcker_Rule.pdf.

59 DoddFrank Wall Street Reform and Consumer ProtectionAct, Public Law 203, 111 Cong., 2d sess. (July 21, 2010) 165(h) (codified at 12 U.S.C. 5365(h)); for an overviewsee Davis Polk & Wardwell, LLP, U.S. Bank HoldingCompanies: Overview of Dodd-Frank EnhancedPrudential Standards Final Rule (2014), http://www.davispolk.com/sites/default/files/Visual.Summary.US_.

Bank_.Holding.Companies.Dodd_.Frank_.Enhanced.Prudential.Standards.pdf.
http://fic.wharton.upenn.edu/fic/Policy%20page/25.Calomiris_forthcoming.pdfhttp://fic.wharton.upenn.edu/fic/Policy%20page/25.Calomiris_forthcoming.pdfhttp://fic.wharton.upenn.edu/fic/Policy%20page/25.Calomiris_forthcoming.pdfhttp://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttachment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdfhttp://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttachment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdfhttp://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttachment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdfhttp://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttachment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdfhttp://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttachment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdfhttp://www.sullcrom.com/siteFiles/Publications/SC_Publication_Volcker_Rule.pdfhttp://www.sullcrom.com/siteFiles/Publications/SC_Publication_Volcker_Rule.pdfhttp://www.sullcrom.com/siteFiles/Publications/SC_Publication_Volcker_Rule.pdfhttp://www.sullcrom.com/siteFiles/Publications/SC_Publication_Volcker_Rule.pdfhttp://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttachment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdfhttp://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttachment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdfhttp://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttachment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdfhttp://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttachment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdfhttp://www.whitecase.com/files/Publication/6cc6997f-c2f1-496b-aab9-9c39c76f8783/Presentation/PublicationAttachment/ad2ac9f2-ad26-4a6e-b5ee-a0b771c027ff/memo_short_guide_to_ceo_10_9_03.pdfhttp://fic.wharton.upenn.edu/fic/Policy%20page/25.Calomiris_forthcoming.pdfhttp://fic.wharton.upenn.edu/fic/Policy%20page/25.Calomiris_forthcoming.pdfhttp://fic.wharton.upenn.edu/fic/Policy%20page/25.Calomiris_forthcoming.pdf


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