(Bloomberg View) — A number of U.S. financial institutionsremain so economically essential and so structurally complex thatthe government would have little choice but to rescue them in an emergency.

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A decision announced by regulators today represents an importantstep toward solving this “too-big-to-fail” problem.

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Many economists and politicians remain concerned about thetoo-big-to-fail issue. Some, including presidential candidateBernie Sanders, urge Congress to break up the banks. Perhaps I'm overlycynical, but I see little chance of any legislative movement onthis front in the next five years.

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That said, there's potential for change to come from regulators.On April 13, the Federal Deposit Insurance Corp. and the FederalReserve Board jointly declared that five major financialinstitutions (Bank of America, Bank of New York Mellon, JP MorganChase, State Street, and Wells Fargo) lacked credible plans todismantle themselves in bankruptcy.

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Under the 2010 Dodd-Frank Act, that declaration gives regulatorsthe power to force major changes at the banks — including requiringthem to sell assets.

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To understand why this is so important, consider somecontext.

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During the crisis year of 2008, regulators had scant informationon the structure or interconnections of the large financialinstitutions that ran into trouble.

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As a result, they had no way of knowing how to imposeappropriate losses on the institutions' creditors while ensuringthat the financial system kept running smoothly.

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The disastrous bankruptcy of Lehman Brothers in September 2008demonstrated how harmful such a failure could be.

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The Dodd-Frank Act sought to address the problem by requiringsystemically important financial institutions to formulate plansfor their rapid but orderly resolution.

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These so-called “living wills” were intended to end the “too bigto fail” problem. If regulators ever felt that a large financialinstitution was insolvent, they could use the living wills toensure that the economy would be left unaffected by the impositionof appropriate losses on creditors.

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If a systemically important financial institution was not ableto come up with a credible living will, then the act empoweredregulators to take more drastic measures. They could require theinstitution to finance itself with more loss absorbing equitycapital, or ultimately to restructure — a process that would likelyinvolve shrinking.

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It has proven very challenging for large financial institutionsto actually come up with workable resolution plans.

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In August 2014, the FDIC found the living wills of 11 financialinstitutions (four of the five above and seven others) notcredible. But without a similar finding by the Federal ReserveBoard, the FDIC's determination was not sufficient to trigger aregulatory response.

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Today, more than 18 months later, the two regulators haveagreed that the five institutions need to make large changes intheir living wills by October 1, 2016. That's the first importantstep in a process that may require those institutions to have a lotmore capital or restructure.

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It's worth noting that a couple of the banks are actually notall that large in terms of assets or liabilities. The processfocuses on the right measure: the potential systemic harm that abank's failure can cause. Just making a financial institution smallmay or may not be the correct remedy. Too-big-to-fail is not aboutsize — it's about importance in a time of crisis.

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I'm sure that the populist calls to break up the banks willpersist. They speak to a deep desire among Americans for some kindof payback for the 2008 economic disaster.

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But those who are actually interested in ending too-big-to-failshould focus on the regulatory process around living wills. It'sworking, slowly but surely, toward a desirable solution. And todayis a real milestone in that journey.

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This column does not necessarily reflect the opinion of theeditorial board or Bloomberg LP and its owners.

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Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.

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