Although U.S. regulators occasionally fist-bump OLA to persuade themselves that an end to bail-outs is nigh, I’m far from the only one who fears that the U.S. remains naked to systemic storms. Forced into the open by its deep level of concern, the IMF this week sounded an alarm bell loudly enough for it – most unusually – to be heard outside the cloistered corners of its private dining rooms. U.S. regulators are now under even more pressure to prove that they’ve gotten too-big-to-fail cut down to size. Since they haven’t, my guess is they’ll find some sacrificial lambs to slaughter with pomp and circumstance. Given that the nation’s biggest banks file their next round of living wills on July 1, the smell of lamb chops is in the air.

In 2013, the FDIC put out a concept release on its single-point-of-entry (SPOE) resolution protocol. It was so vague that I then despaired of its credibility and, given that, the broader ability of the U.S. system to go from too-big-to-fail (TBTF) to what I’ll call you’re-on-your-own (YOYO) resolution. Much to some of your consternation at the time, I filed a personal comment letter with the FDIC begging it quickly to put YOYO on offer. Without a real, credible YOYO policy, regulators can bluster all they want about how much they know in the privacy of their SPOE-planning sessions, but under acute stress, few will believe them and most will act to save themselves at considerable cost to financial stability.

The IMF has now called this bluff. In its 2015 consultation on the U.S. it unequivocally said that resolution plans are nice, but knowing what to do with them is better. It believes that cross-border implementation of orderly resolution for any of the nation’s largest banks is, at best, iffy. It doesn’t go into detail on why, other than to say that legislation remains needed to handle depositor preference (a minor issue in the U.S. that remains a large thorn sticking into crisis-management plans around the globe).

This may seem like mild chastisement, but even this is tough talk from the usually discrete Fund. Taken together with the far more blunt warnings in the report — that FSOC is dysfunctional, U.S. regulators can’t find their way to any common policy, and data on what causes risk here remains to be gathered — the Fund’s fears are clearly so compelling as to force it out into the open.

Every big-bank CEO I know wants a YOYO, not TBTF policy. Each knows that only YOYO gives them the flexibility to play a competitive game that offers reasonable shareholder return, not de facto conversion into public utilities. All also say that they do not know how to craft living wills to satisfy both the FRB and FDIC because so many aspects of the cross-border resolution regime are, as the Fund said, uncertain. Although big banks sucked it in last year and agreed to contractual stays, most of their counterparties are adamantly against this, putting banks in a very awkward middle position in the absence of cross-border law on this critical point.

And, as I said two years ago, no one has a clue about how to handle a big bank’s non-banking operations, of which most have many. Even worse, if a systemic crisis this time comes from a non-bank – all too real a prospect given bond-market jitters – a systemic crisis wholly unimagined by any of the resolution standards would erupt. Designating one or another insurance company or asset manager a SIFI does nothing – zip – to address systemic risk outside the banking sector in the absence of YOYO not just for banks, but also for them.

But, with July 1 a few short weeks away, politics will trump policy. Banks can and should wave their YOYOs, but no one will believe they are anything more than play-things if the FRB and FDIC again sanction the largest U.S. banks. If the July 1 plans are rejected – and I believe several will flunk – calls for counter-productive interventions will only accelerate.

One of the great ironies of this situation is that some of the rules cause much of the growing non-bank systemic risk. The IMF also warns of this, and we recently issued an in-depth report laying this out in more detail. If the living wills fail the credibility test and opinion-leaders then sanction big banks for being TBTF, more rules will come that not only make these banks far less effective financial intermediaries, but also make the system itself far less stable.  

Had the FRB and FDIC made OLA into a YOYO far faster and far more transparently, we might not now be facing this dangerous predicament. That we are and that a few banks will pay an awful price for a policy not of their making is a sad conclusion to draw about Dodd-Frank five years on. No wonder the IMF decided to be so blunt – if only it had sounded the alarm sooner.