Moving Away From Banks and Other Companies "Too Big to Fail"

The FDIC is progressing in its development of new rules that will apply to financial firms — not just banks — deemed “too big to fail.” The rules would establish procedures for unwinding companies whose failure would pose a threat to the economy, when that failure appears to be imminent. The government organization approved a set of proposed rules and is now looking for comments from the public. A 91-page PDF explains the current proposed rules. Although the comments have not been enabled yet, you will soon be able to send messages to the FDIC on this proposal here.

Congress has already given more authority to the FDIC to unwind large financial institutions as they have been doing for failing banks. According to the director of the FDIC, this will shift the responsibility of keeping the country’s economic system stable from taxpayers — all of us who bailed out the financial industry through our tax dollars — to shareholders of companies deemed “too big to fail.”

Just like banks pay fees to FDIC now, to ensure coverage if their institutions fail, companies covered in these new procedures will likely need to pay for the protection. We’ve seen bank products increasing cost to the consumer, as companies pass higher expenses down the line, and I expect the same will happen to a broader mix of financial companies. Years ago, regulation forced companies too large to break up into smaller companies, but the government is taking a different approach today. Through this plan, financial companies might find it less profitable to be considered in the “too big to fail” category.

Doing business with a “too big to fail” company most likely means paying more for services you can find elsewhere. The selection of available services may be broad and the services might be convenient, but just like the CoinStar issue, you’ll need to determine whether the convenience is worth the extra cost.

Large financial institutions have also been able to attract the best talent, thanks to stratospheric compensation packages. The proposed rules include a clawback provision; if a company fails and regulators determine that certain executives did not perform their job well enough or could have prevented the collapse, they might decide those responsible executives must return some of their compensation. If this rule survives the final implementation of the procedures, larger firms may have a more difficult time attracting talent. The FDIC is in the process of suing to recover compensation from bank executives responsible for the recent economic collapse, but according to the Washington Post, these suits are moving slower than they should, particularly when compared to the situation after the Savings and Loan crisis in the 1980s and early 1990s.

I don’t know whether it’s possible to fully avoid financial companies considered “too big to fail.” With the knowledge that these regulations are coming, we can guess how it may reshape the financial industry, from fees to company sizes.