Does Dodd-Frank Really Guarantee Big Banks?
In the first presidential debate, one of Jim Lehrer’s “hard hitting and incisive” questions was to ask Governor Romney whether he thought any current regulation was “excessive.” In the response, Romney said the following:
Dodd-Frank was passed. And it includes within it a number of provisions that I think has some unintended consequences that are harmful to the economy. One is it designates a number of banks as too big to fail, and they're effectively guaranteed by the federal government. This is the biggest kiss that's been given to — to New York banks I've ever seen. This is an enormous boon for them.
Is this explanation of the law correct? Not by a long shot.
Dodd-Frank directs the Financial Stability Oversight Council (that includes all of the financial regulatory agencies) to designate entities as “systemically important.” The standard used by FSOC is whether the demise of the financial institution could affect the entire system.
The consequence of such designation is that the entity has capital and margin requirements that are more onerous than others and must produce and maintain a plan for winding themselves up if they become untenable. In other words, the whole point of the law is to avoid a situation where the federal government again has to rescue failing big banks that threaten to take the economy down with them.
To say that Dodd-Frank extends a guarantee to these institutions is exactly backward: In fact, the law slaps a bunch of extra requirements on the biggest banks. What bank would want to be so designated? The answer, of course, is none. Dodd-Frank wasn’t a kiss given to Jamie Dimon and his colleagues; but misleading the public about that law -- and thus aiding efforts to kill it off -- is such a kiss.
So to repeat: Dodd-Frank does not enshrine bank bailouts in law, and you would think that the President would go ballistic on the assertion that his reform law guarantees Wall Street. Maybe he will get a second chance in round two.
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