Why a Big Bank Failure Isn’t in the Offing (Yet)

By Rob Blackwell

When the Dow Jones Industrial Average entered free fall this week before recovering somewhat on Thursday, the rhetoric over a possible big bank failure heated up. The most obvious target was Bank of America Corp., which saw its stock price plummet amid concerns about its exposure to Europe and significant put-back risk. Despite the bank’s claims that it had sufficient capital and liquidity to weather the storm, some analysts began publicly saying its days were numbered. That, in turn, gave rise to speculation about whether regulators were prepared to take down a large bank, or if the new Dodd-Frank resolution authority was even workable. With that in mind, we offer the following frequently asked questions to sort out whether a failure is in the offing and how regulators would know when to take out a big bank. How will regulators know when to step in? This is the $64 billion question, because it relies on a subjective judgment from regulators. So do you think the Treasury secretary will chicken out? One of the underlying fears of the whole debate right now is that there is still some way to bail out a bank if it gets into trouble — or that there is a good reason to do so. “You don’t have to bail people out when you have a bridge structure,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics. “You have an orderly liquidation, which isn’t the same. There isn’t a need for a bailout if you have that, executing discipline in a timely fashion.”