Vitter, Garrett introduce bill to prevent spread of “too big to fail”

David Vitter

Sen. David Vitter (R-La.) and Rep. Scott Garrett (R-N.J.) introduced legislation on Thursday that would prevent “too big to fail” from spreading to other financial institutions.

The measure, called the Terminating the Expansion of Too-Big-To-Fail Act, would eliminate the government’s authority to designate certain non-bank institutions as “systemically important” as mandated by the 2010 Dodd-Frank Act.

“Our bill takes the federal government out of the business of picking winners and losers in the economy because they’re too-big-to-fail,” Vitter said. “While I’ll continue fighting to eliminate this mentality with the megabanks, we need to stop the spread of the too-big-to-fail virus into other sectors of the economy. Dodd-Frank took the problem that led to the Wall Street bailouts and made it the standard. Now we’re seeing the problem expanding. This bill is a modest first step in rolling back the expansion of the bailout state that Dodd-Frank enshrined.”

Dodd-Frank established the Financial Stability Oversight Council, a group of financial regulators headed by Treasury Secretary Timothy Geithner. Vitter said that the rule provides no guidance as to what standards will be used to label institutions as “systemically important financial institutions,” or SIFIs. Those institutions labeled as SIFIs are subject to increased regulatory pressure from the Federal Reserve.

The Federal Reserve proposed a rule that would essentially take standards applied to America’s largest banks and apply them to non-bank institutions. Geithner said in testimony before the House Financial Services Committee in July that non-bank SIFI designations would be issued by the end of the year.

“We cannot allow ‘too-big-to-fail’ to take root in our non-bank financial institutions,” Garrett said. “These institutions must not be allowed to be captured in the same regulatory scheme that will protect them from market forces, stifle innovation and creativity in the broader financial sector, and ensure taxpayers remain on the hook for their failure.”