Two members of the House Financial Services Committee this week released competing staff analyses on whether, or how, the 2010 Dodd-Frank Act addresses the America’s “too-big-to-fail” banks.
The report released by ranking committee member Barney Frank, a Democrat, details “how in fact the law provides for the orderly dissolution of failing institutions in order to protect the broader economy.”
“It accomplishes this result through two basic means — first, by providing a set of tools to ensure that large complex financial firms and the financial system in which they operate are more stable and transparent, and that regulators can supervise the financial system and its constituent parts more effectively; and second, by ensuring that a failing financial firm can fail in a fashion that minimizes risks to the financial system without any ultimate cost to taxpayers,” the Democrat’s report said.
The report by Republicans, released by Spencer Bachus, the committee’s chairman, however, counters that claim, saying that Dodd-Frank does not eliminate too-big-to-fail or taxpayer bailouts.
“The largest financial institutions in America remain ‘too big to fail;’ in fact, they are even bigger now than they were at the height of the crisis,” the Republican report said. “And the Dodd-Frank Act most certainly did not end bailouts; instead, it institutionalized them and made them permanent in the form of the ‘Orderly Liquidation Authority’ set forth in Title II of the Act. American taxpayers are no better protected against bailouts than they were in 2008: if anything, they are even more expose to the danger that government bureaucrats will pick their pockets to bail out the creditors of the next ‘too big to fail’ institution that finds itself on the brink of failure.”
Additionally, the report revealed that America’s five biggest financial institutions hold more than half of the industry’s assets, equivalent to almost 60 percent of the nation’s gross domestic product. The nation’s 20 largest institutions hold 80 percent of the industry’s assets, about 86 percent of GDP.
The Republican report also criticizes the “resolution authority” given to the Federal Deposit Insurance Corp. under Title II of Dodd-Frank.
“The Dodd-Frank’s ‘resolution authority’ has a couple of problems that its supporters would rather you did not notice,” the report said. “The first is that it simply won’t work for the largest, most complex financial institutions.”
The report said that the resolution authority grants the FDIC the power to purchase a failing firm’s assets, guarantee its obligations and pay off its creditors. The FDIC is also authorized to borrow from the Treasury up to 90 percent of the fair value of the firm’s total consolidated after 30 days.
Additionally, the report points to claims by proponents of Dodd-Frank that the law ends taxpayer bailouts, saying that while shareholders will not be reimbursed, creditors will be paid in full.
“That’s how you make the resolution of a ‘too big to fail’ institution ‘orderly,’” the report said. “That’s how you keep financial markets from panicking when a ‘too big to fail’ institution…fails. You pay off everyone in sight.”
The Republican report added that creditors, “who are often themselves ‘too big to fail,’” should take more responsibility.
“We want them to analyze the risks they are taking on, rather than expecting that the FDIC will step in to pay them off if things get bad enough,” the report said. “It is, after all, the analysis of risk (rather than relying on an implicit government guarantee or an FDIC-provided backstop) that is necessary to allocate capital efficiently in our economy…Instead, by subsidizing ‘too big to fail’ institutions and insuring the creditors of these institutions against the consequences of their poor decisions, the Dodd-Frank Act all but ensure that capital will continue to be misallocated while our economy continues to founder.”