Are America's Banks Still Too Big to Fail?

In the throes of the 2008 financial crisis -- as the country's biggest banks were starting to fall like a row of dominos and the whole banking and credit system seemed on the verge of collapse -- the federal government scrambled like mad, trying to figure out how to halt what looked like an inevitable slide into the economic abyss. Impromptu meetings were held around the clock among government officials and bank managers to determine exactly where each bank stood financially and what it was going to take for each to be stabilized.

Similar scenes were played out in countries around the world. It was a desperate, seat-of-the-pants moment in economic history that no one ever wanted to repeat. As such, last fall the G-20 nations asked each of the world's 29 biggest banks to complete a "living will" that would provide for an orderly shutdown of said banks in the event of another crisis. But a new survey reveals that only one of the 29 has done so. That's bad news for the rest of us. Some experts question whether it's even possible to resolve massive interconnected banks with divisions spanning across multiple borders.

The new world banking order
June is the deadline for banks to submit drafts of their living wills to their country's regulators for review, with the idea that approved plans will be in place by the end of the year. From the U.S., the list of banks deemed "too big to fail" includes Bank of America (NYS: BAC) , Wells Fargo (NYS: WFC) , Citigroup (NYS: C) , Goldman Sachs (NYS: GS) , and JPMorgan Chase (NYS: JPM) .

Each country's bank regulators are responsible for mandating the specifics to be included in their banks' living wills. In the U.S., the Federal Deposit Insurance Corp. has a two-part mandate. The "recovery" portion must be a snapshot of each bank's current business, including risk concentration, investments, and trading counterparties. This will help the FDIC monitor each bank's ongoing health. The "resolution" portion must be a detailed plan for winding up the bank's business in an orderly fashion should bankruptcy be the only option.

Imagining your demise is hard work
According to a survey by the global accounting firm Ernst & Young, all participating U.S. banks have written at least the recovery portion of their living wills, as have three out of four European banks, but none of the Japanese banks is even halfway through this initial phase. For the resolution portion, none of the Japanese banks have started and one-third of all the others have not begun this important work.

Citing anonymous sources at participating U.S. and U.K. banks, Financial Times is reporting that the primary holdup is disagreements among the regulatory agencies in the different countries. All countries have different bankruptcy rules and different depositor-protection laws. So if you're a big German bank with an office in Tokyo, instead of having to draw up a recovery and resolution plan just for German regulators, you also have to draw one up for Japanese regulators.

The bigger they are, the harder they fall on the rest of us
Though coined decades earlier, the phrase "too big to fail" became ubiquitous during and after the 2008 financial crisis because it so concisely and intuitively explained the situation America's banks and economy were then facing.

Today, America's banks are bigger than ever. Merger deals were actually pushed by the federal government to keep some of the smaller, struggling players alive. Merrill Lynch, next in line to fall after Lehman Brothers disintegrated, was purchased at the last minute by Bank of America. Bear Stearns subsumed itself into JPMorgan Chase, Wachovia into Wells Fargo. If you can't make the banks smaller, the thinking appears to go, you can at least make lemonade out of lemons by having fewer banks to monitor and potentially wind up!

Regulatory matters are rarely straightforward, even when dealing with one country. Banks facing two or more regulators have a legitimate gripe, but have to push on with as much urgency as possible, because no one wants a bunch of agitated bankers and sweaty government officials making seat-of-the-pants decisions the rest of us have to live with.

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At the time thisarticle was published Fool contributorJohn Grgurichis aiming to become too big to fail, so the government will bail him out no matter how many stupid financial decisions he makes, but he own no shares of any of the companies mentioned in this column. Follow John's dispatches from the bloody front lines of capitalism onTwitter@TMFGrgurich. The Motley Fool owns shares of Wells Fargo. The Fool owns shares of and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of The Goldman Sachs Group. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has a perfectly scintillatingdisclosure policy.

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