Dodd-Frank Didn't End 'Too Big To Fail,' Standard & Poor's Says

07/13/2011 11:37 am ET | Updated Sep 12, 2011

Despite efforts to increase accountability and minimize the need for government assistance in the financial sector, some banks may still be considered too big to fail, Standard and Poor's announced this week.

In a report issued Tuesday, the company noted that even though the Dodd-Frank Act, passed nearly a year ago, contains a provision that allows the government to seize and dismantle troubled financial institutions in a way that eliminates the need for bankruptcies or bailouts, the process might not work in all cases.

"We believe that under certain circumstances and with selected systemically important financial institutions... future extraordinary government support is still possible," the report says.

This is not the first time concerns have been raised about the seize-and-dismantle process outlined in Dodd-Frank, known as Orderly Liquidation Authority, or OLA.

Although Sheila Bair, then chairman of the Federal Deposit Insurance Corporation, told the Financial Crisis Inquiry Commission in September that orderly liquidation was "a fundamental part" of how Dodd-Frank can prevent too-big-to-fail scenarios, skeptics have charged that the government is more likely to offer a bailout to foundering institutions than carry out the process as described in the law.

"Most people think that we'll get a bailout if a Bank of America or a Citigroup runs into trouble," University of Pennsylvania professor David Skeel told Reuters in February.

The Standard & Poor's report reflects these beliefs. Noting that the U.S. government "has a long track record of supporting its large and systemically important financial institutions despite its stated preference for not doing so," the report concludes that in situations where the failure of a financial institution would lead to a catastrophic loss of investor confidence, "banks may need extraordinary government support after all."

In May, a panel of financial executives at the Milken Institute Global Conference came to the "unanimous" conclusion that orderly liquidation was unfeasible, due to its limited ability to mitigate market panic, according to The Motley Fool.

One member of the panel, Moody's CEO Ray McDaniel, said that "the orderly liquidation mechanism as envisioned is probably not workable."

Still, at least one legislator central to the reform process is pushing back against the skepticism. In February, Representative Barney Frank, co-author of the financial reform law, acknowledged that "some people are saying [the government] won't have the guts" to follow through with orderly liquidation.

But, Frank added, "I don't have any question that we're going to go through with it."