Christy Romero, the acting Special Inspector General for the TARP bank bailout program, told the House Financial Services Committee on Tuesday that the Dodd-Frank financial regulatory law may not end the “too big to fail” policy and the moral hazard surrounding it.
Testifying before the House Financial Services Committee’s Financial Institutions and Consumer Credit Subcommittee, Romero said that as far as the market is concerned, too big to fail is not dead.
“The mere enactment of the Dodd-Frank act did not end the concept of ‘too big to fail’ in the market’s eyes,” Romero said. “So long as the financial institutions, counterparties, and ratings agencies believe there will be future bailouts, competitive advantages associated with ‘too big to fail’ institutions will almost certainly persist.”
Romero noted that shortly after the passage of Dodd-Frank – which gave the Federal Deposit Insurance Corporation (FDIC) the power to wind-down large financial institutions – two major credit-rating agencies announced they would permanently incorporate the likelihood of government bailouts into their ratings of major bank bonds.