Federal, News, Oversight, Regulation

Regulators’ authority to end TBTF under Dodd-Frank still unclear

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,.

Dodd-Frank proponents  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.

At a hearing before the House Financial Services Subcommittee on Oversight and Investigation, 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 or criteria to define what constitutes a threat.

“To date, the Fed and the FDIC have not judged a living will deficient,” Patrick McHenry, the chairman of the subcommittee, 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.  Large banks, they argue, in part, derive an unfair competitive advantage relative to firms that are not deemed too-big-to-fail because their status allows them to secure lower borrowing costs.”

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