I asked a top lobbyist yesterday what he thinks will happen in the few substantive hours between Congress’ return from recess on Tuesday and its departure shortly thereafter for the campaign trail. A little bit of budget to keep the lights on is his wan hope; a lot of political posturing is his forecast. My bet is that what he fears is what we’ll get. If so, big banks will get a real shellacking on whether they remain too big to fail. A Wall Street Journal editorial Thursday said it most clearly: going after big banks on TBTF is one of the few populist, bipartisan themes Republicans can mobilize to get their candidates across the finish line.

One reason for the potency of TBTF politics is that there’s policy truth to TBTF fears. That’s why the biggest challenge to the largest banks — not just now, but even more importantly in the next Congress — is to make U.S. law to end TBTF into a reality that practically can be counted upon to do so.

Bank regulators are building the ever more formidable fortress of micro- and macro-prudential standards for the very biggest banks, naming one or another non-bank SIFI along the way just to make the GOP even madder about TBTF. Regardless of the merits of all this action to implement Title I of Dodd-Frank, none of it does diddly for Title II, the law’s critical section creating an orderly-liquidation framework designed to ensure that systemic financial institutions – banks and non-banks alike – go bust without an accompanying macroeconomic bomb.

In February, I laid out my views on what needs to be done to make OLA the credible resolution framework I still hope it can be. The comment to the FDIC was on its December, 2013 request for thoughts on the single-point-of-entry (SPOE) resolution protocol which both U.S. regulators and big banks believe will cure TBTF. Since that concept release, the FDIC has done nothing further in public to bolster SPOE’s credibility. Instead and in concert with the FRB, it’s been hoping that global developments would clear away two of SPOE’s thorniest points, making it then far easier for the FDIC to lay out a framework that convinces skeptics on Capitol Hill – not to mention some still in the FDIC – that bankruptcy can work and, thus, SPOE too is a functional emergency safety net.

What are these two global Hail Mary efforts? First is an industry agreement under the auspices of the International Swaps and Derivatives Association (ISDA) to limit early-termination rights when a SIFI hits the fan. These automatic stays permit foreign resolution authority to sort out who owes whom in complex derivatives contracts so that everyone gets paid in due course and, before that, no one panics. ISDA’s problem and, thus, the FDIC’s, is that buy-side investors aren’t feeling all that happy about giving up a right that served them very, very well during the 2008 crisis – while not providing financial stability.  

SPOE’s second and even larger challenge is the need for there to be enough money at the top of a faltering SIFI to ensure that the lights stay on without a taxpayer bail-out and, if taxpayer support is required, then it’s only temporary and can quickly be repaid by the failed SIFI’s creditors.

This insulation layer is called “gone concern loss absorption capacity” or GLAC is in the elegant prose that all too often characterizes global pronouncements. The FRB needs to propose GLAC in the U.S. and it promised to do so ASAP late last year as the FDIC rolled out the SPOE outline. Since then, though, all quiet, with the FRB and FDIC joining forces in Basel in hopes of getting global regulators to go in with them on a tough GLAC layer that really could answer TBTF skeptics and still not put U.S. SIFIS at grave competitive disadvantage.

From what I hear, GLAC will issue forth from the Financial Stability Board in the next couple of weeks in only general terms, with the G-20 summit then endorsing it in concept when heads of state issue the regulatory communique none of them reads anymore. Consensus that there needs to be GLAC has broken down in these global negotiations, but not because someone thinks it isn’t a good idea. Rather, the breakdown has been over how much GLAC is needed, of what is it comprised and to whom could be sold and when. Without consistent and robust answers to these questions that make GLAC a real bulwark, TBTF remains a very worrisome prospect, especially given that so much else in SPOE is still so speculative.

Nations that are used to TBTF and, indeed, that have no choice but to be since many of their banks are also too big to rescue are loathe to saddle already struggling banks with anything like a meaningful layer of GLAC that insulates systemically-important banks from chaos. The thought of GLAC for non-bank SIFIs is even farther afield from FSB’s comfy conference rooms because there’s still no agreement outside of some insurance SIFIs on who these non-bank big boys are and what should be done with them. The U.S. shares this problem.   Although Dodd-Frank is designed to shutter all SIFIs, not just big banks, the FDIC has yet even to contemplate if SPOE works for a non-bank or even a non-traditional big bank. Given recent history – AIG, Lehman, you know the drill – this is not an academic issue.

I said at the start of this note that a top lobbyist fears a political fracas when Congress comes back to town. Still, a vice chairman of one of the U.S. G-SIBs also told me that he thinks there’s plenty of time to build SPOE out before TBTF advocates get too much traction. I don’t think G-SIBs have the luxury of time. Nor, do U.S. regulators have the political “creds” to get the benefit of the doubt as they try to finalize a complex framework behind closed doors. If SPOE doesn’t get quickly off the drawing board backed by a credible amount of up-front unsecured long-term debt, something will shake still-fragile financial markets and we’ll be doing TBTF all over again.