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How Do We Ensure Big Banks Aren't 'Too Big To Fail?'


There's been a lot of talk in this election season about those banks that, in 2008, were deemed too big to fail. As part of the crackdown after the federal bailout, every year, the big banks have to write up a kind of emergency action plan to make sure the meltdown of eight years ago doesn't happen again. This past week, the Federal Reserve and the FDIC looked at these contingency plans for five of the biggest banks and said - sorry, these aren't good enough.

The banks have until October to come up with something better. As part of our weekly series Hanging On, where we look at issues facing the middle class in this election year, we're going to dig a little deeper into why banks are still too big to fail and how the candidates are addressing all this.

NPR's Jim Zarroli joins me now. Hey, Jim.


MARTIN: As I understand it, Jim, the big banks have to show this emergency plan every year. So what happened this year? What fell short? And why does it matter?

ZARROLI: Well, it's actually - these are called living wills. They were required under the Dodd-Frank financial overhaul bill. And they basically say actually that the eight biggest banks have to come up with these plans that spell out what they would do in bankruptcy. And if they can't do that, the regulators have the authority to break them up.

And what happened this week was, you know, kind of a midterm. The regulators looked at the plans of all eight banks and said to five of them, you know, your plans aren't good enough. Go back and redo them. It's likely that they will do that and that they'll pass next time. I mean, there's a lot at stake for the banks.

MARTIN: A lot at stake for presidential candidates, too, who are making banking and Wall Street reform essential part of their platform, i.e., Bernie Sanders. I imagine he probably seized on this issue. What was his response?

ZARROLI: You know, this is a signature issue for him. He says it all the time - you know, the banks have gotten too big. They represent a threat to the economy. He said it again in Thursday night's debate with Hillary Clinton.


BERNIE SANDERS: We have got to break them up so that they do not pose a systemic risk and so that we have a vibrant economy with a competitive financial system.

ZARROLI: And he says the fact that the regulators rejected these living wills this week just proves what he's been saying all along. Now, I have to say recently people have begun to question Sen. Sanders about this idea of breaking up the banks. You may have read about that New York Daily News interview he did.


ZARROLI: In the interview, at least, I think a lot of people say that Sen. Sanders didn't seem to have real answers. And this is a big issue in New York because, of course, the banks are major employers here.

MARTIN: So this is where I ask you that hard question (laughter). As someone who has studied this stuff and reported on economic issues and banking for a long time - what does the law actually say? I mean, can a potential President Sanders really force a bank to be broken up at all - in the first place legally - and then how would it happen?

ZARROLI: Well, it's not a simple issue. I mean, there is a process under Dodd-Frank spelling out how the big banks can be broken up. The Dodd-Frank set up something called the Financial Stability Oversight Council. And it can recommend that a bank be split up if it poses a big risk to financial stability. Hillary Clinton actually says, you know, there is a process. It's a good process. We have to let it work. Here, she talked about it in the debate on Thursday night.


HILLARY CLINTON: Yes, sometimes the government may have to order certain actions. Sometimes the government can permit the institution themselves to take those actions. That has to be the judgment of the regulators.

ZARROLI: You know, the problem for Clinton is that there's so much anger about the big banks right now. And Bernie Sanders has really capitalized on it. He's portrayed her as being, you know, in the pockets of Wall Street. And she's had to bend over backwards to show she can be tough on the banks, too. You know, she wants to go after executive bonuses. So you've had both Democrats trying to compete with each other to show that they can be tougher on the - on Wall Street.

MARTIN: What about the Republicans, Jim? John Kasich, Donald Trump, Ted Cruz - do they talk at all about wanting to break up the banks?

ZARROLI: Well, you know, they talk about it less than the Democrats. All of them say they're against Dodd-Frank. All of them want to repeal it. Ted Cruz says it's had enormous regulatory burden on small banks. Both Trump and Cruz have really been critical of bank bailouts.

All of them have also been a lot less specific about, sort of, what the role of the government should be in regulating the banks. You know, if the economy's in trouble and a bank poses a systemic risk to the economy, you know, what should regulators do? Do they step in? Or should they take a kind of hands-off approach? That's really the question that has been raised after 2008 and the financial crisis. And it's a question that the candidates haven't really answered.

MARTIN: NPR's Jim Zarroli. Jim, thanks so much for breaking it down for us.

ZARROLI: You're welcome. Transcript provided by NPR, Copyright NPR.