"Many Dodd-Frank reforms intended to be stabilizing actually hindered the resolution process and amplified contagion risk," Saltzman says.
In addition to the counterparty limits, other policies that complicated resolution included Dodd-Frank's derivatives push-out provisions and the regulators' unofficial ban on dealmaking by any of the large institutions.
There are plenty of other issues to consider and it's likely the industry will attempt another simulation, perhaps in conjunction with the FDIC.
"We have briefings for regulators scheduled in early January, and look forward to finding ways to get them more engaged in any future simulations," Saltzman says.
The FDIC has, rather quietly, been doing a series of more narrowly focused tabletop exercises, and did do a broader simulation to learn more about the decision-making process needed to pull off one of these large-bank resolutions.
It, too, was conducted in December and it sounds like the Fed participated but all I could get was a description of the simulation from the FDIC. It "involved evaluating the required steps and possible alternatives when making the decision to potentially implement a Title-II resolution for a failing SIFI (systemically important financial institution)," the FDIC said. "The simulation tested the intra- and inter-agency decision making process leading up to Title-II resolution, identified issues and resolution alternatives, and improved interagency communication and coordination in the context of Title-II."
Sounds interesting. But the more detail regulators and the industry can provide on these and other simulations, the more we may finally begin to believe that Too Big to Fail is over.
