Dodd-Frank Restricts Competition Among Financial Firms
March 23, 2015
Lawmakers are not paying enough attention to Title VIII of the 2010 Dodd-Frank Act, which has created new regulatory frameworks for certain payment, clearing, and settlement (PCS) companies.
One problem is that Title VIII broadens the concept of what constitutes a public utility to include companies in the financial industry. Newly designated PCS firms are now legally referred to as financial market utilities (FMUs), a term that conveys a special status for one segment of financial markets.
What follows is a summary for the main reasons why Title VIII and the FMU pose long-term threats to free enterprise:
- The public utility concept is anticompetitive because it allows incumbent firms to protect their profits and dominant positions at the expense of potential rivals.
- The FMU designation mistakenly implies that the financial industry cannot function unless the PCS segment remains structured as it currently exists. No financial companies should be isolated from potential competition and technological innovation in this manner.
- The FMU concept imposes standardization on markets, thus hindering innovation and competition and threatening the long-term strength and stability of financial markets.
- The Title VIII FMU designation has only further socialized the cost of financial risk-taking and, therefore, increased the likelihood of future financial crises and bailouts. Former Federal Deposit Insurance Corporation (FDIC) Chair Shelia Bair notes that certain PCS firms "were drooling at the prospect of having access to loans from the Fed" when Title VIII was being crafted.
- Based on the history of public utilities, the FMU designation is likely to restrict competition, concentrate financial risk, and raise consumer prices.
Title VIII will ultimately restrict competition among financial firms, increase consumer prices, concentrate financial risk, and invite taxpayer bailouts. In its entirety, Title VIII provides yet another reason why Congress should repeal the Dodd-Frank Act.
Source: Norbert J. Michel, "Financial Market Utilities: One More Dangerous Concept in Dood-Frank," Heritage Foundation, March 20, 2015.
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