Is this a solution to ‘too big to fail?”

Jeffrey M. Lacker, had of the Federal Reserve of Richmond, spoke on ‘too big to fail’

Here are his main points:

• “Too big to fail” results from two mutually reinforcing conditions: Investors feel protected by an implicit commitment of government support, and policymakers feel compelled to provide that support to avoid a disruptive adjustment of expectations.
• The origins of too big to fail can be traced back to the introduction of federal deposit insurance in 1933. The problem was exacerbated by a series of rescues by the Federal Reserve and the FDIC that began in the 1970s, and by policymakers’ actions during the financial crisis of 2007–08.
• The Orderly Liquidation Authority created by the Dodd-Frank Act retains many of the flaws of ad-hoc pre-crisis practices and does little to improve creditors’ incentives to monitor risk-taking.
• A better strategy for ending too big to fail is the provision in the Dodd-Frank Act requiring large financial firms to prepare “living wills” detailing how they could be resolved under the Bankruptcy Code.
• Resolution planning is difficult work, but living wills must be credible in order for policymakers to commit to using them rather than relying on government backstops.