Beyond Dodd-Frank: Pinning Down the Octozilla of Too-Big-to-Fail with Multiple Market Instruments

A principal purpose of Dodd-Frank is to end "too-big-to-fail." It makes improvements, but leaves in place two market failures that continue too-big-to-fail. Large banks receive an implicit subsidy, because of the continuing perception that they are too-big-to-fail. They also face incentives to make riskier investment choices because while they fully capture the returns for successful investments, the losses from catastrophic failures will be shared by taxpayers. Moreover, the costs of complying with Dodd-Frank's regulations may make smaller banks "too-small-to-succeed." Consequently, we need to go beyond the command-and-control approach of the Dodd-Frank Act, and adopt economic instruments to correct these market failures.