We have previously commented on the efforts worldwide to make the financial system "healthier" via the Basel III process of forcing financial institutions to strengthen their capital base. We now focus on the other end of the process: in the event of another crisis, does the choice lie only between total government de facto or de jure purchase or control as in RBS or AIG, or bankruptcy?
The Dodd-Frank Act creates the concept of an intermediate step, base on U.S. regulatory practice in dealing with troubled banks. It creates a "hospital" for "sick" financial institutions where they can be "treated" or "merged" short of the drastic, and often cataclysmic, step of bankruptcy.
On January 18th, the Financial Stability Oversight Council (FSOC) issued a proposed rule outlining a system for designating "non-bank financial firms" for heightened supervision under the Dodd-Frank Act. It also issued recommendations regarding concentration limits on large financial companies, and the implementation of the Volcker Rule.