by Norbert J. Michel, John L. Ligon
The Heritage Foundation
April 23, 2014
Many experts recognize that the government will still step in to support some financial institutions rather than allow them to go through bankruptcy. Dodd-Frank has worsened this too-big-to-fail problem by expanding the capital requirements that contributed to the 2008 financial crisis. The best way to end this problem is through a credible federal commitment not to use taxpayer funds to save financially troubled companies. A credible commitment to let firms fail would allow the private sector to price risk as accurately as possible and would alleviate the need for formal capital standards. A good first step toward such a commitment would be to eliminate risk-based capital requirements and expose financial firms’ managers to more market discipline. Simultaneously, Congress should begin to dismantle the regulations that Dodd-Frank imposed on the financial sector.