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Cmte Financial Services (R)
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FSC Majority | Week in Review

Washington, Jul 10 -

Committee Explores Dodd-Frank's Impact on Financial Stability

On Thursday, the Financial Services Committee held the first of a series of planned hearings on the impacts the Dodd-Frank Act has had in the five years since it was signed into law.

Thursday’s hearing focused on whether Dodd-Frank has made the financial system more or less stable, and it comes on the heels of a report from the Financial Stability Oversight Council (FSOC) that many of the systemic risks identified by FSOC are the direct result of government policies, including Dodd-Frank.  Dodd-Frank’s Volcker Rule, for example, has made capital markets less liquid and more fragile, undermining rather than enhancing financial stability.  The lack of liquidity means financial markets have less capacity to deal with shocks and will be more likely to seize up in a panic.  Rather than making markets more stable, the new regulations have made them more brittle.

Backing that up, a recent Federal Reserve survey of credit officers shows that “over four-fifths of respondents characterized current liquidity and market functioning…as having deteriorated over the past five years,” according to a Reuters report.

Chairman Jeb Hensarling (R-TX) in his opening statement emphasized the increased risk to stability that Dodd-Frank has created. "Dodd-Frank has codified 'Too Big to Fail' into law and provided a taxpayer-funded bailout system in Title I and Title II of the Act. This simply leads to even greater moral hazard and to greater instability. According to the Richmond Federal Reserve, the explicit federal guarantees of financial sector liabilities have increased to a whopping 60 percent post-Dodd-Frank. When private investors, depositors, and counterparties expect a bailout, their incentives to monitor risk clearly wane. Regulatory micromanagement is no substitute for market discipline. By this measure, Dodd-Frank has clearly made our financial system riskier."

Rep. Robert Hurt spoke on Dodd-Frank's unintended consequences that have harmed Main Street, our economy’s engine for job creation and growth. "This month marks the fifth anniversary of the Dodd-Frank Act, which was sold to the American people as a solution to the financial crisis of 2008. A recent Harvard study articulates how Dodd-Frank has actually given Wall Street an advantage over Main Street - the exact opposite of what its proponents said it would do. The consequences of this misguided law have been increased burdens on our Main Street banks and their customers through excessive regulations, contributing to a stagnant economy and unnecessarily high unemployment rates."

Mark Calabria, Director of Financial Regulation Studies at the Cato Institute, testified at Thursday’s hearing that “moral hazard has been increased by Dodd-Frank’s expansion of the financial safety net and increased concentration of risk into fewer entities, while the primary 18 causes of the crisis were largely left untouched.”

The Financial Institutions and Consumer Credit Subcommittee held a hearing on Wednesday to examine the designation process of “systemically important financial institutions” (SIFIs) and the impact it has on financial institutions. Committee members heard testimony about the process for determining whether bank holding companies (BHCs) are systemically important and the consequences these designations carry.

Many commentators – including members of Congress and banking regulators – have criticized the arbitrary manner in which the Dodd-Frank Act designates bank holding companies as systemically important.