NCPA - National Center for Policy Analysis

Dodd-Frank In Need Financial Reform

June 4, 2015

Congress is marking the five-year anniversary of Dodd-Frank with legislative efforts in the financial regulatory arena. Improvements to regulatory processes are one component of these initiatives. Procedural reforms are not very glamorous, but they are essential in the pursuit of effective regulatory oversight of the financial industry.

The Senate Banking Committee met last month to consider a multi-pronged draft financial reform bill. Much of the bill is a laundry list of technical corrections to Dodd-Frank. Fixing these myriad little flaws is an important step toward admitting that Dodd-Frank is no exception to the rule that 800-plus-page statutes are bound to contain imperfections.

Some of these revisions to Dodd-Frank include:

  • Changes to the way financial companies are deemed to be systemic ― systemic designations imply a government interest in keeping the designated firm alive.
  • A new designation process for bank holding companies between $50 and $500 billion would replace the current automatic systemic classification of these large bank holding companies.
  • In designating banks and non-banks, the Council would have to explain the reasons for its proposed designations. 
  • The draft bill also would require the Council to revisit its systemic determinations periodically. 

With these changes, a company could lose its designation and the implicit government backstop that arguably comes with it at any time. The temporary nature of the designation would prevent the rise of a permanent class of systemic institutions.

Additionally, the result would be that companies would have a clearer understanding of why the Financial Stability Oversight Council thinks they are systemic and hence what they can do to be less so. Offering companies concrete ways to avoid designation would help to reduce the number of systemic institutions, which would serve a worthy Dodd-Frank objective-ending too-big-to-fail.

Source: Hester Peirce, "It's Not Glamorous, But a Very Necessary Financial Reform," Real Clear Markets, June 3, 2015. 

 

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