Bench Memos

C. Boyden Gray and Adam White on Too-Big-To-Fail

C. Boyden Gray and Adam White have a great cover story in The Weekly Standard on Dodd-Frank and “too-big-to-fail” financial institutions, entitled “The Biggest Kiss.” Some details:

On the Financial Stability Oversight Council’s SIFI designation power:

[Unofficial too-big to fail status has already subsidized big banks by up to $84 billion].  Instead of ending that subsidy to big banks, Dodd-Frank intensifies it in at least three ways. First, by officially designating SIFIs, Dodd-Frank eliminates any uncertainty as to whether a bank is actually considered too big to fail. Second, by lowering the asset threshold from $100 billion to $50 billion, it increases the number of likely SIFIs. And third, by including not just banks but also nonbank financial companies, Dodd-Frank further expands the universe of possible SIFIs.

On Dodd-Frank’s Orderly Liquidation Authority:

[Proponents of Dodd-Frank argue that the OLA ends too-big to fail]. That is wishful thinking. Title II does not actually require the government to “wind down” a troubled SIFI. Under Dodd-Frank, “liquidation” can consist of the government keeping the company alive and restructuring it by use of an FDIC-created “bridge financial company.”

In fact, that is the approach endorsed by the FDIC’s acting chairman, Martin J. Gruenberg. The FDIC will not wind down troubled SIFIs, as President Obama promised; instead, as Gruenberg explained in a May 10 speech, the FDIC’s “most promising resolution strategy” will be to take the SIFI parent company into receivership, transfer its assets to a bridge company, operate its subsidiary banking units, and ultimately keep the SIFI alive—an outcome that, Gruenberg suggested, will not just “mitigate systemic consequences” but also “preserve the franchise value of the firm.”

On the Consumer Financial Protection Bureau:

Because the CFPB wields such power—not just to define and punish “unfair,” “deceptive,” and “abusive” practices, but also to administer many statutes long committed to other agencies’ jurisdiction—the CFPB is capable of wreaking regulatory havoc in the consumer banking industry. . . .

By writing new law through case-by-case enforcement, and by asserting “exception authority” to effectively re-write statutes, the CFPB is substantially increasing bankers’ compliance costs. The absence of clear, simple, up-front rules will force banks to hire ever more lawyers and regulatory compliance officers to keep up with changing laws—an outcome that inherently favors big banks over smaller ones. “Bank of America can fill a skyscraper with attorneys to comply with all the rules and regulations, but a community bank can’t do that,” Iowa’s banking superintendent told USA Today last year. “I know some bankers that are probably just going to quit making mortgage loans. I mean, what’s the point?”

Exit mobile version