In 2009, Federal Reserve chairman Ben Bernanke told members of the Federal Crisis Inquiry Commission that regulatory reform would be a failure if it did not contemplate a system by which Goldman Sachs could go bankrupt and its creditors lose money.

While few would call banking regulatory reform a failure — thus far, at least — it has fallen well short of what Bernanke wanted. The "too-big-to-fail" problem, defined as the government using taxpayer dollars to rescue "systemically important" banks, remains unsolved. And the solutions being debated may elevate overall industry risk instead of subduing it.

Taxpayer-funded bank rescues are political dynamite, of course, but in addition, the expectation of bailouts provides banks no incentive to guard against excessive risk. The recent history of ad-hoc crisis resolution — think Citigroup, Lehman Brothers, and General Motors — contributes to a climate of uncertainty. Major bank rescues can spark global economic upheaval, so it would help if everyone knew the game plan at the Treasury Department and the Federal Reserve before any future failures of large banks.

"Systemically important" banks are not going away. Banking regulators want their banks safe, sound, and big, says Ernie Patrikis, a partner in the bank and insurance regulatory practice of White & Case LLP. Many CFOs of multinational firms also see the money-center banks as indispensable for management, investment banking, and capital-raising. "They're some of the best-run banks in the country," says JoAnn Lilek, finance chief at consulting firm Accretive Solutions and former CFO of Midwest Bank Holdings. "They're very well managed, they're perceived to be very solid, and the breadth of services is incredible."

Many CFOs think irresponsible management should suffer the consequences, but worry that, absent a government safety net, middle-market companies would be more vulnerable. While large corporations can just increase their stable of lenders, smaller companies have to concentrate their credit relationships with one or two banks to get access to debt, explains Lilek. In addition, many finance chiefs at midsize companies would not have the expertise or bandwidth to do the necessary credit monitoring that the removal of an implicit government backstop would require.

"If government bailouts were absolutely prohibited, I would be very concerned that [the problems of three years ago] would play out again and again," says Ron Box, finance chief at Joe Money Machinery, a construction-equipment dealer. "It is a fact of life that we have a global financial system with very complex interrelated parts. Unfortunately, I do not believe that the clock can be turned back to a more isolationist time."

Can U.S. banking regulators really solve — partially or in whole — the too-big-to-fail problem without exposing financial institutions to higher capital costs, subjecting nonfinancial companies (banks' customers) to another credit crunch, or being granted an incredible amount of political independence?

You Say You Want a Resolution
After the demise of Lehman Brothers, letting the operating entities of big banks declare the kind of Chapter 11 in which they enter a turnaround situation or are acquired without government assistance seems unwise. And it is nearly impossible in the current regulatory framework, say restructuring experts. Allowing an insured bank to fail naturally shifts substantial risk back to the Feds. "What happens if someone takes those deposits guaranteed by the government and uses them up?" asks Jacen Dinoff, a principal at KCP Advisory Group. "You're not going to see a bank file Chapter 11 and sit in bankruptcy winding down its assets while depositors petition as creditors to get percentage recoveries on life savings."

The Dodd-Frank Wall Street Reform and Consumer Protection Act does limit how far regulators will go in propping up a large bank. The law grants the FDIC powers to dismantle the largest financial firms when they falter; the FDIC becomes a receiver for a bank if its failing presents a systemic risk to the financial markets. To help regulators devise plans to wind down huge banks, the biggest U.S. institutions — those with $50 billion in assets or greater — have to write "living wills." The FDIC and the Federal Reserve were given 18 months to write a joint rule governing the drafting of living wills, so the rule could be unveiled later this year.

These bank-resolution blueprints might limit the amount the federal government would have to spend on bailouts, and they would also, to a degree, allow "market forces to creatively destruct an institution," says Michael Hagedorn, CFO of UMB Financial, a $12 billion regional bank holding company. But the disposition of assets would need to be orderly, he says. For example, some of the largest banks in the United States perform securities processing for banks like UMB. "That couldn't go away tomorrow and not have a big impact on the U.S. economy," he says. "But you can sell that business to someone else, a much-better-run bank."

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