The Dodd-Frank Act was created to ensure more accountability at banks and stave off the risks of a future too-big-to-fail scenario.
However, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, is quoted in an article from Bloomberg, saying the Dodd-Frank Act may not curb the risks of the too-big-to-fail banks.
Instead, a more standard bankruptcy mechanism, specialized for financial institutions, would improve the risks stemming from systemically significant banks, Plosser suggested.
Plosser believes banks should be allowed to fail, and by having higher capital standards, they will be better positioned in good times and in bad.
“The current efforts may come up short,” Plosser said. “If we are to end discretionary bailouts and the associated moral hazard problems that they create, we should seek more rule-like methods to resolve failing firms” using bankruptcy.
