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Report: Dodd-Frank Act Does Not End Too Big to Fail But Perpetuates It as Official Policy

Washington, July 21, 2014 -

July 21, 2014

Report: Dodd-Frank Act Does Not End Too Big to Fail But Perpetuates It as Official Policy

WASHINGTON - House Financial Services Committee Chairman Jeb Hensarling (R-TX) and Oversight and Investigations Subcommittee Chairman Patrick McHenry (R-NC) today released a committee staff report that concludes the Dodd-Frank Act did not end “too big to fail” as the law’s supporters claim, but actually had the opposite effect of further entrenching “too big to fail” as official government policy.

The report, titled Failing to End Too Big to Fail: An Assessment of the Dodd-Frank Act Four Years Later, comes just days before the fourth anniversary of the signing of the Dodd-Frank Act into law by President Obama.

The report is the result of the Committee’s investigation into Dodd-Frank’s provisions regarding bailouts and “too big to fail.” The report also examines the causes of the 2008 financial crisis and the bailouts Washington gave to large, complex financial institutions.

“In no way, shape or form does the Dodd-Frank Act end ‘too big to fail.’ Not even Timothy Geithner believed his talking points on that,” said Chairman Hensarling, referring to the former Treasury secretary’s recent comments that “of course” “too big to fail” still exists.

“Instead, Dodd-Frank actually enshrines ‘too big to fail’ into law. Today, hardworking taxpayers are at greater risk of being forced to fund yet more Wall Street bailouts. Dodd-Frank officially designates an entire category of Wall Street firms as ‘too big to fail’ and then creates a taxpayer-financed bailout fund for their use,” Chairman Hensarling said.

Oversight and Investigations Subcommittee Chairman Rep. McHenry said, “Rather than institute market discipline and a clear rules-based regime, four years later, Dodd-Frank's failed policies have only worsened the risks within the financial system and recklessly handed financial regulators a blank check for taxpayer-funded bailouts.

"Today’s report not only convincingly rebukes President Obama’s false promise that Dodd-Frank represented 'no more tax-funded bailouts – period,' but it also levels with the American people that widespread consensus confirms that Dodd-Frank has institutionalized ‘too big to fail’ at the peril of local communities and their access to capital,” Chairman McHenry added.

Republicans on the Financial Services Committee plan to introduce legislation “to repeal Dodd-Frank’s bailout fund and take other steps to end ‘too big to fail’ once and for all,” said Chairman Hensarling.

The report is available here.

Key Findings

“Failing to End Too Big to Fail: An Assessment of the Dodd-Frank Act Four Years Later”

  • Problems with Title I of Dodd-Frank
    • The Financial Stability Oversight Council (FSOC) is an unwieldy conglomeration of regulatory officials charged with identifying risks and taking steps to mitigate them
      • FSOC has failed to live up to its statutory mission to identify and mitigate systemic risk
      • The authority to designate nonbank financial companies undermines market discipline by signaling that some firms are “too big to fail”
      • FSOC’s voting structure displaces regulatory expertise and makes FSOC itself a source of systemic risk
      • FSOC’s designations of non-bank financial companies to date underscore the flaws in its governance structure and statutory mandate
      • FSOC’s record-keeping practices undermine public and congressional oversight, reducing FSOC’s accountability and increasing the likelihood that FSOC will not remedy deficiencies in its operations
    • The Office of Financial Research (OFR) is charged with collecting financial data to identify systemic risks
      • OFR has taken some steps to carry out its mission, but its progress has been unsatisfactory and its data collection efforts risk imposing substantial costs in return for speculative benefits
      • OFR failed its first high-profile test in identifying sources of “systemic risk,” issuing an analysis of the asset management industry that most experts have criticized as superficial and uninformed.
    • “Living wills” submitted under Section 165(d) of Dodd-Frank may give regulators greater understanding of the firms they regulate but do not end “too big to fail”
  • Problems with Title II of Dodd-Frank
    • The proponents of Dodd-Frank never offered an adequate explanation of how the “Orderly Liquidation Authority” would end bailouts
    • Almost four years after Dodd-Frank’s passage, the effectiveness of the “Orderly Liquidation Authority” as a tool for addressing the failure of large, complex financial institutions remains seriously in doubt
    • The FDIC’s strategy for implementing Title II – the “Single Point of Entry” – is a recipe for future AIG-style bailouts
    • Contrary to the claims of its proponents, Dodd-Frank leaves taxpayers exposed to the costs of resolving large, complex financial institutions
    • The “Orderly Liquidation Authority” has not ended “too big to fail”
  • Dodd-Frank misses some obvious problems and creates new ones
    • The Government-Sponsored Enterprises (GSEs) are still “too big to fail”
    • Firms designated as Financial Market Utilities under Dodd-Frank are the next generation of GSEs
    • As amended by Dodd-Frank, Section 13(3) of the Federal Reserve Act remains a powerful bailout tool
    • Dodd-Frank does not rein in other bailout authorities possessed by regulators
    • Regulatory requirements imposed under Dodd-Frank create compliance burdens that distort the free market by making it harder for small-to-medium sized financial institutions to compete with larger firms, further entrenching “too big to fail”


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