Bank too big to fail? There's a plan for that

There's a secret reason why banks have been super-cautious for the past two years. Government regulators put banks on notice in May 2010, that they cannot expect a bailout should they face collapse. This is according to previously secret documents that were released to the media this week.

ATLANTA, GA (Catholic Online) - Banks have been told to prepare what are described as "living wills" so regulators can dismantle them if they encounter further problems. 

It's a wake-up call to big banks, telling them there will not be another bailout, but rather a controlled dismantling of their assets should they fail again.

"Make no assumption of extraordinary support from the public sector," the documents said. 
Several large banks including Citigroup, Morgan Stanley, and JPMorgan Chase, to were told to prepare contingency plans for their own demise. Banks were ordered to be prepared to sell off assets, obtain funding from outside sources, and to reduce risk. 

The secret plans are part of the Frank-Dodd Act, which are known as "resolution plans." These plans, or "living wills" as they are also known, provide a plan for banks and regulators to follow to prevent a bailout of "too big to fail" institutions. 

Americans have been none too pleased with big banks, who when faced with failure took massive bailouts from taxpayers. Following a return to stability, financial institutions then went looking for new revenues - from their customers. Most of the moves proved unpopular. 

Bank of America in particular, gained infamy over the past year as the bank people loved to hate because they attempted to implement a host of new fees. Customers rejected many of the new fees, seeing them as ingratitude and spite, in the face of the bailout. 

Meanwhile, Bank of America defended its position, saying it needed new revenues to offset losses and to maintain stability.

Despite regulations and other safety measures, economics are cyclical. Banks must adapt to changes in the business cycle like every other institution. Those adaptations may not be popular, and sometimes they may be mishandled, but it is a certain thing that changes will come. Among those changes will be dramatic shifts in the banking sector over time. Sooner or later, there will be another meltdown, and a bank that is regarded as "too big to fail" will do just that. 

The good news is, now there's a plan for that.

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