The Federal Reserve and FDIC didn't exactly distinguish themselves in doling out failing grades last month to 11 of the largest foreign and domestic banks for their living wills, says Hal Scott, a professor of international financial systems at Harvard Law School and director of the Committee on Capital Markets Regulation.

The wills detail how the banks would wind themselves down if a crisis hit.

"Reports on the dialogue between regulators and the big banks show that the Fed and FDIC set objectives but offered no clear guidance on how the banks could meet them," Scott writes in The Wall Street Journal.

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"The FDIC said that the plans provided 'no credible or clear path through bankruptcy.' Such pronouncements open up the possibility of potentially harmful regulation, including hiking capital and liquidity requirements further, and even asserting broad power to break up the biggest banks."

There is no clear process for regulators to evaluate living wills and "no one can answer what it will take to devise a living will that will pass muster with the Fed and the FDIC."

"Until regulators clearly define the criteria for a living-will passing grade and focus on their mission of sorting out critical from noncritical functions, bank by bank, they risk undermining the process and their own credibility," Scott argues.

"But if regulators assure the market that any of a large bank's critical functions will remain operational when a bank becomes insolvent — while assuring taxpayers that no public support will be necessary — and if we also equip regulators with tools to combat contagious runs, then no bank will need to be 'too big to fail.' The resolution process will have earned not only a passing grade, but high honors."

Rodgin Cohen, senior chairman of Sullivan & Cromwell law firm, criticized the regulators too. "It's unfortunate that there have been public findings before there has been any substantive communications with the banks," he tells Bloomberg.

Sullivan & Cromwell represents several of the 11 banks.

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