Too Big To Fail

David Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business, agrees: “Unlike 2007 to 2009, the largest banks are very well-capitalized and recently passed an annual stress test. The major bank regulators have not expressed any concerns” about too big to fail to be a major problem.

Even if the specter of too big to fail banks appears to be less concerning to experts and regulators in 2020 than it was a decade ago, the warning signs of excessive leverage and illiquidity that threw the global economy into recession in 2008 are being closely monitored.

Kass notes that the Federal Reserve has suspended stock buybacks at big banks in the third quarter to deal with the unknown potential fallout from the pandemic. The Fed also capped dividends at a certain percentage of income.

Still, some banks will always be more flimsily positioned than others, and some cracks have begun to emerge at major U.S. banks. “Wells Fargo did recently cut its cash dividend by 80% as a result of a quarterly loss resulting from adding to its reserves as it anticipates loan losses” from the pandemic, Kass says.