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House subcommittee criticizes Fed for lack of criteria identifying threats to financial stability

126px-US-FederalReserveSystem-Seal.svgNearly three years after the passage of the Dodd-Frank Act, federal regulators have not yet clarified their authority under Dodd-Frank to dismantle “too big to fail” institutions.

“To date, the Fed and the FDIC have not judged a living will deficient,” Patrick McHenry, the chairman of the House Financial Services Subcommittee on Oversight and Investigation, said. “However, certain federal officials have indicated that the Fed and FDIC are prepared to use their authority under section 165 to impose substantive changes on companies’ structures. Relatedly, under Section 121, some have recently argued that the government should order certain large financial institutions to divest assets or operations — i.e., to ‘break them up’ — as a means of further reducing systemic risk.”

Dodd-Frank proponents have said the legislation puts an end to TBTF because regulators are able to take steps to reduce the likelihood of a major bank failure and the impact of such a failure on the economy, but critics maintain the implicit guarantee of a government bailout only increases risk in the financial system.

At a hearing before the subcommittee last week, senior officials from the Fed said the regulator has not yet developed standards to determine whether an institution poses a “grave threat to the financial stability of the U.S.” as laid out by Dodd-Frank.

“That would be a determination that would depend very much on the facts and circumstances of the case,” Federal Reserve General Counsel Scott Alvarez said, according to The BLT: The Blog of LegalTimes. “It is very difficult to have a uniform rule.”

Alvarez responded to criticism by Rep. Sean Duffy (R-Wis.) regarding the regulator’s lack of metrics to determine whether an institution poses a risk to the financial system.

“Stability gets built by the other pieces of Dodd-Frank we’re putting together—the enhanced prudential standards, the capital requirements, the liquidity requirements, by building up and working out details of the orderly liquidation authority,” Alvarez said, The BLT reports.

Rep. Dennis Ross (R-Fla.), however, warned that the lack of criteria to establish a risk could prove risky in the future.

“It’s more or less a game-time decision to determine whether a grave threat exists?” Ross said, according to The BLT. “You determine based on, I guess, discretion at the moment—that what may be considered a grave threat today may not be a grave threat tomorrow. It will be a situation of too late to save, because you’re not going to be able to save these institutions if you have no standards in place by which they know how to correct what they don’t even know is incorrect.”

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