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House Votes for Bipartisan Bill to Fix Dodd-Frank ‘Mistake’ on Gauging Risk

Washington, Dec 1 -

WASHINGTON – The House passed bipartisan legislation on Thursday to better gauge and more accurately reflect the potential risks that financial institutions could pose to the economy.

The bill, the Systemic Risk Designation Improvement Act, replaces an arbitrary threshold included in the Dodd-Frank Act that regulators are using to designate so-called systemically important financial institutions.  The House voted to approve the bill by a vote of 254-161.

Barney Frank, the former congressman who is the co-author of the Dodd-Frank Act, admitted in testimony before the House Financial Services Committee in 2014 that the threshold he wrote into law is “arbitrary” and expressed support for adjusting it.  He also later called the threshold a “mistake.”

“So what we’re trying to do here today with this bipartisan bill is try to provide a solution, try to fix a genuinely recognized mistake in Dodd-Frank.  And what those who oppose this bill are trying to do is to preserve that mistake in the law,” said Financial Services Committee Chairman Jeb Hensarling (R-TX).  “I urge us to correct this Dodd-Frank mistake.” 

The arbitrary threshold written into Dodd-Frank “is not based on a logical formula, on research or on any evidence at all.  Instead, it is simply a random number picked out of thin air,” Chairman Hensarling said.

Rep. Blaine Luetkemeyer, the sponsor of the bill who serves as Chairman of the Housing and Insurance Subcommittee, said the bill “would protect U.S. taxpayers from actual risk posed to the financial system.  Decisions on what institutions are deemed systemically important should be based not on size alone, but also on activity and other factors that actually demonstrate systemic risk.”

Specifically, the bill would more accurately reflect the true risks financial institutions pose by considering their business activities.  Before they can be designated as systemically important, regulators would have to take into consideration the asset size of a bank holding company, the interconnectedness of the institution, its complexity and the global nature of the bank holding company.

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