Government officials believe ever-intensifying regulatory requirements will force the largest banks to shrink and simplify to the point they are no longer a threat to the financial system.
Bankers see a very different future where they adjust their business models to Dodd-Frank's mandates and pretty much carry on.
The likely reality lies somewhere in the middle.
Federal Reserve Board leaders, including soon-to-be chairman Janet Yellen, are determined to turn up the regulatory heat until the biggest banks melt.
(To see more posts from Barb Rehm's Blog, click here.)
Testifying at her confirmation hearing last week Yellen said resolving "too big to fail" is among the most important goals of the postcrisis period because it creates moral hazard and corrodes market discipline.
"It creates a threat to financial stability, and it does unfairly, in my view, advantage large banking firms over small ones," Yellen said, adding her prescription for the largest banks: "We should be making it tougher for them to compete and encouraging them to be smaller and less systemic."
That jibes precisely with Fed Govs. Jeremy Stein and Dan Tarullo who have both said the Fed must keep increasing capital charges and tightening liquidity rules until the largest banks slim down and get simpler on their own -- or until their shareholders demand it.
Capital and liquidity are just the sharpest of the regulators' tools. A host of macroprudential standards as well as trading limits are coming. Regulators are also working on a debt requirement for holding companies and new limits on wholesale funding. Officials have wide latitude to demand changes via living wills and stress tests.
But listening to bankers you do not get the sense a regulatory juggernaut is about to bury the largest players.
Some executives say they view the Dodd-Frank Act as protection against competition because it erects an enormous barrier to entering the business. Rivals in Europe are weak and nonbank competitors here at home are slowly being brought under the same regulatory framework applied to banks. Insurers and commercial finance companies are abandoning the business, which should make it easier for the giants to dominate.
"If you believe the world is going to keep growing, if you believe the European banks are a mess, which they are, then how do we not make money because no one can enter our business?" an executive at one of the largest banks told me.
He added: "And Tarullo won't be there forever."
That's the banks' ace in the hole. The regulators in power today won't be the regulators in office a few years from now. The proverbial pendulum must swing back eventually.
For months I dismissed such talk as a case of communal denial or fanciful wishful thinking. In fact, I drafted a story I never published that would have fit under this headline: "Lies Bankers Tell Themselves."
But I've slowly become convinced the executives at the major banks are at least partially right.
Why? Because consider how severe regulation would have to get before the giant banks would voluntarily shrink enough that they would no longer be considered systemically important.
"The question is this: how far are the regulators willing to go? There is only so much they can ratchet it up," says a former senior regulator. "Change is and will continue to happen at the margin."
And he's right. Change is occurring. The largest banks are ditching entire business lines like student lending and ending targeted activities like proprietary trading. They are being hit with public enforcement actions and massive fines.
But that doesn't mean they will shrink to a size that's no longer considered systemically important. I think we will always have megabanks. But their business models will change. Whether those changes end up making the system safer or not remains to be seen.
Greg Wilson, a former McKinsey partner and Treasury Department official who now runs his own consultancy in Washington, says there are "two ends of the spectrum but I am not sure they are mutually exclusive There is no doubt in my mind that the regulators will go down that path with the intent to put a lid on the big banks.
"But having said that, if you believe in markets and our history of the last couple hundred years, the big banks will continue to get bigger. They will find other growth opportunities, either in the nonbanking world or outside this country or both."
Ernie Patrikis, a former New York Fed official now with White & Case in New York, largely agrees.
"I don't think the big banks are going to shrink and go away. I can't see major bank boards of directors or CEOs saying we're going to scale back because of all this," he said. "There will be new activities we haven't thought of and not all of them will be capital-intensive activities."
Patrikis sums it up nicely: "I don't think they will get smaller. I do think they will be stronger."
And that leads to an important question: What's the endgame on TBTF?
To some it's the break up of the largest institutions into lots of smaller pieces. But to most it's a stable financial system, and that might very well occur with the higher, tougher capital and liquidity standards being put in place and the more intensive oversight being applied to the behemoths.
"The endgame is not necessarily a world without SIFIs," or systemically important financial institutions, says Paul Saltzman, president of The Clearing House Association. "That's never going to happen. The only prudent thing we can do is mitigate the risk of their failure by ex-ante putting in all these rules and ex-post having a resolution framework that works. That's the answer."
Barbara A. Rehm is American Banker's Editor at Large.