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Sat. May 25, 2024
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Are 'Systemically Important' Institutions Too Big To Fail?
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Are systemically important financial institutions (SIFIs) necessarily 'too big to fail'? Not according to outgoing FDIC Chair Sheila Bair, who drew that distinction in testimony on proposed financial regulations implementing the Dodd-Frank laws. That, of course, begs the question: Just how systemically important are they then? Bair is a believer in prudent yet extensive regulation and a sunny optimist about the power and wisdom of government regulators. The 2010 Dodd-Frank laws create sweeping new authorities for the FDIC to identify financial firms whose collapse might threaten the financial system as a whole (hence 'systemically important'), and to structure and indeed micro-manage their business and governance arrangements in alliance with the Fed and the U.S. Treasury. Supposedly to guarantee they don't fail and never need a bailout. (There are more than hints of the Troubled Asset Relief Program (TARP), which regulators like Bair have promised will not be repeated.) Conceptually, it is hard to see how institutionalizing a permanent TARP-like level of oversight will make financial firms more secure. It might achieve fewer surprises to regulators, maybe, but this massive increase in reporting, regulation, and oversight inevitably means even more chances for collusion among financial institutions and the Feds--precisely the sort of collusion that astute analysts argue did more to create the crashes of 2008 than any other single factor. You could argue that a defined and orderly liquidation process would mean that troubled firms can be phased out gradually rather than rescued at all cost (or rescued by preemptive micromanagement rather than post-facto liquidation). But what is the practical difference between 'orderly liquidation' and 'bailout'? A difference in noise level, maybe. How defined and orderly is the Dodd-Frank approach anyway? That depends in part on the regulations Bair and her colleagues come up with, working toward a year-end deadline. That is a problem in itself. The Dodd-Frank law is so vaguely written that, as former top Fed lawyer Michael Bleier points out, 'the overall economic and financial circumstances in which a hypothetical failure will occur are not determinable, even where many aspects of a firm's structure and operations are': "Without knowing what caused the distress leading to the 'failure', it will be difficult for a firm to establish that its resolution plan will actually prevent further distress. Unfortunately, the statute does not address this matter." [Emphasis added] That seems a critical matter not to address. Or, as Bair--ever optimistic--puts it: "The FDIC and the Fed wield considerable authority to shape the content of these plans, first in this rule-making and second through the ongoing monitoring of the institutions' compliance." That's policy-speak for kicking the can down a very long road. Furthermore, it is that 'considerable authority' that should concern all Americans, and free-market lovers everywhere. A grossly ill-defined law, assigning massive authority over the entire financial sector (banking firms with assets $50 billion or more, plus nonbank financial firms as subjectively determined by the Fed, FDIC, et al.), is much more than a problem of regulatory overreach. It is a direct assault on the notion that government must have defined limits. What is more, the 'systemically important' strictures of Dodd-Frank puts the Federal Reserve--probably the institution of the federal government least accountable to the public--in the driver's seat. Even if the letter of Dodd-Frank and its implementing regulations don't spell that out, it remains true because the financial sector is wholly dependent on the Fed as monetary authority and lender of last resort. To award the central bank such a powerful direct role in the management of the U.S. economy quite literally puts in question the tripartite (legislative, executive, judiciary) nature of the constitutional system in a way not seen since the New Deal; possibly not since the days of Chief Justice Marshall. The current sitting Congress, very different from the Congress which passed Dodd-Frank, should not quietly concede this revolution in U.S. economic and constitutional affairs. At the very least Congress should use its power of the purse, accompanied by its ongoing powers of investigation and oversight, to delay implementation of Dodd-Frank's 'systemically important' regulations until the regulators can prove they have a bright-line, closely defined set of rules that will guide financial and nonbank firms in compliance. We wouldn't bet money on it, but you never know. If it cannot, Dodd-Frank must be scrapped. George A. Pieler is an attorney and former Fed lawyer. Jens F. Laurson is editor-at-large of the International Affairs Forum.

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