Fed governor: Regulators show promise in ending 'too big to fail'

By Peter Schroeder - 03/04/13 03:15 PM ET

Financial regulators are taking big strides toward eliminating "too big to fail" banks, but successfully implementing a key goal of the Dodd-Frank financial reform law is far from a sure thing, according to a top Federal Reserve official.

Jerome Powell, a governor of the Federal Reserve Board, said Monday that regulatory efforts to end bailouts are "generally on the right track." But a litany of challenges await, and further steps to rein in the risks posed by banks may be necessary.

"The too-big-to-fail reform project is massive in scope. In my view, it holds real promise," he told a bankers conference in Washington. "But the project will take years to complete. Success is not assured."

Whether Dodd-Frank successfully ended the existence of "too big to fail" in the financial system remains a controversial topic both on and off the Hill. Backers of the law, including the Obama administration, maintain that the overhaul finally gave regulators the power to unwind massive and influential financial institutions without disrupting the broader market, and the law also eliminates the ability to grant the massive bailouts that were so publicly reviled during the last crisis.

But skeptics maintain that the law actually codifies "too big to fail," by identifying which firms are the most essential, implicitly suggesting that the government will step up and mount a rescue if disaster strikes again.

Powell, who previously saw major financial institutions collapse while at the Treasury Department in the early 90s, and later with the rest of the world during the financial crisis, admitted he was initially skeptical about regulators' ability to safely wind down a massively complex financial firm.

"I believed that an attempt to resolve one of these firms -- a firm with multiple business lines carried out through countless legal entities, across many jurisdictions and different legal systems -- could easily spin out of control," he said.

But a closer look has made him into a believer, and Powell now believes that banking regulators could step in and get the job done if the circumstances demanded it.

As such, he said regulators should be given the time to fully implement the provisions. But if they cannot defuse the "too big to fail" threat alone, Powell said further steps may be necessary. Placing further limits on banking activity, size, or actually breaking up the nation's largest banks have been common suggestions for addressing "too big to fail," and Powell said they deserved consideration if necessary.