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The Dodd-Frank Act has failed to achieve its stated goals. Instead, evidence suggests that Dodd-Frank has reinforced investor’s perceptions that the largest financial institutions enjoy an extended government safety net. Rather than ending too-big-to-fail, Dodd-Frank’s provisions create new uncertainties around the resolution process for large financial institutions.
As the great economist Joseph Schumpeter rightly said, “Capitalism not only never is, but never can be, stationary.” Of the ten largest banks in 1981, only two still exist as independent companies.
The Dodd-Frank Act (DFA) uses the phrase “systemic risk” 39 times without defining it. Because the term is ambiguous, the law allows the regulatory agencies wide discretion. The DFA directs agencies to draft and implement rules to control and minimize “systemic risk” without requiring the agencies to identify specifically what they are attempting to control or minimize.
While there is reason to be concerned that Basel III gives banks too much latitude, allowing capital regulation to be guided solely by stress tests is a mistake for a number of reasons.
Complaints about the FSOC arise because this agency has the extraordinary power to designate financial firms as systemically important financial institutions and there is very little evidence available anywhere that it has the ability or desire to use that power other than arbitrarily. Indeed, all the evidence is to the contrary.
One cannot assume that a supervisory structure designed to stabilize very large banks is equally well suited to other financial entities. Given the considerable differences in how such institutions and funds are structured and operate, one should expect that applying the same regulatory standards would yield at least some unexpected and undesirable outcomes.
Basel I, II and III were developed by bank regulators, approved by an international agreement among bank regulators, and subsequently applied to the US banking industry. In this testimony, I discuss reasons why congressional abstention from this process was not a good idea.
The Shadow Financial Regulatory Committee believes that a prudential tax would be a blunt instrument that would add unnecessarily to the overall complexity of existing prudential and supervisory tools while not significantly mitigating the key sources of systemic risk that proved critical in the financial crisis.
In her letter to the editor, Colleen Kelley, president of the National Treasury Employees Union, argues that my op-ed "Guess Who Makes More Than Bankers: Their Regulators" is flawed, but she misses the fact that the comparison she recommends was in a detailed AEI report at the time the op-ed appeared.
Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.
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