FDIC's "Too Big to Fail" Rules Might Not Work

The Federal Deposit Insurance Corp. (FDIC) was on the frontlines of the financial crisis and remains a key figure throughout the recovery. The agency has risen to prominence in the past few years, liquidating more than 350 failed banks since 2008, overseeing the acquisitions of Wachovia and Washington Mutual and pushing for reforms under the Dodd-Frank Wall Street Reform and Consumer Protection Act--which gave the FDIC authority over larger, more complex financial organizations and seems guaranteed to remain an important presence in the financial regulatory regime.

"The FDIC is really important once every 20 years," says John Douglas, head of Davis Polk's bank regulatory practice and former general counsel of the FDIC from 1987 to 1989. "After the savings and loan crisis of the 1990s, it went back to being the supervisor of small banks in Kansas, but after this crisis it not only will supervise those small banks, it will be a more significant player in what goes on in the future. It's really gotten a substantially enhanced role in our financial sector."

Rigid Rules

Experts also raise concerns that the FDIC rules are too rigid, hamstringing regulators with prescribed processes whereas in the case of, for example, AIG, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson had more flexibility. Perhaps they pushed the laws to the outer limit in doing so, says attorney Ron Glancz, but they exercised their discretion in an emergency and in doing so may have saved the financial system.

Associate Editor

Melissa Maleske

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