Senators from opposite ends of the US political spectrum are finally asking the question that should have been answered before Dodd-Frank became law: how big is “too big to fail”?

Democrat Sherrod Brown and Republican David Vitter have asked the General Accountability Office the investigative agency of the US Congress, to quantify the subsidy too big to fail banks receive from what are in effect taxpayer guarantees.

The subsidy is the funding advantage that the banks receive because their creditors know they will be made whole in the event of financial stress, just as creditors were during the financial crisis.

The drafters of the Dodd-Frank Act rarely stopped to consider the subsidy. Rather, they tried to prevent the next systemic failure while a fusillade of regulatory weaponry: elevated capital and liquidity standards, living wills, new resolution regimes and highly intrusive regulation. This approach ignores how market discipline is the essential tool in controlling risk-taking. The failure of a business must always be a realistic option.

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