Today, I was on the Up with Chris Hayes show to discuss the comments made by President Obama and Governor Romney about Dodd-Frank in the first president debates.

There is much to say on this topic, more than can fit even into a long-form program like Up with Chris, so I wanted to present some of my preparation notes on the topics discussed.

Anyone who knows me, knows that I think Dodd-Frank does not go far enough, and that I want to see bank executives behind bars for the crimes leading up to, and following, the financial crisis. But I also believe there is much in Dodd-Frank that is important, and we need to acknowledge that, or we will lose it to the many efforts already underway to gut it. Thus, it is important that we understand what Dodd-Frank does, giving credit where it’s due.

Does Dodd-Frank Designate Banks as Too Big to Fail?

In the debate, Romney stated that Dodd-Frank “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.

What Romney is referring to is a designation of being a “Systemically Important Financial Institution” or SIFI for short. But this designation does NOT designate a bank as Too Big to Fail. Further, Wall Street does not see being slapped with the SIFI label as a boon. This was pointed out well by Rep. Maxine Waters in an article at the Huffington Post.

As just one example of how much Wall Street hates the SIFI label, take a look at how Jamie Dimon complained about the SIFI requirements to Fed Chairman Bernanke back in 2011. As another example, Alice Joe, who is the executive director for the (unflinchingly pro-Wall Street) Chamber of Commerce’s Center for Capital Markets Competitiveness has said thatThere’s a huge, huge cost in becoming a designated SIFI.”

Why is Jamie Dimon complaining (among a chorus of others)? Because being a SIFI comes with a host of new rules and regulations to follow, including Section 165, Enhanced Prudential Standards. It should be stressed that these rules are important, and many (like economist Anat Admati, and former FDIC chair Sheila Bair) think that they don’t go far enough! But it doesn’t take much to make Jamie Dimon complain.

Section 165 imposes many restrictions on SIFIs. Here is just three of them:

  • Single Counterparty Exposure Limit: Big banks cannot have exposure to other big banks in excess of 10% of their capital & surplus
  • Capital Requirements: They must maintain a minimum 5% Tier 1 Common Risk-Based Capital Ratio. This has to do with how much cash the bank must keep on hand, versus its other obligations.
  • A requirement that the SIFI have enough highly liquid assets on hand to survive a 30-day projected liquidity crisis.

So, who is a SIFI today? Any bank that has $50 billion in assets or more is automatically a SIFI. In addition, there is a way that the Financial Stability Oversight Council (FSOC) can designate a non-bank financial company to be a SIFI. Think of AIG, the insurance company, as a good potential candidate for the SIFI designation.

For more on SIFIs as it relates to the October Presidential debate, see the excellent discussion by Mike Konczal over at the Next New Deal.

Does Dodd-Frank Hurt Small Banks?

One of the things that Governor Romney claimed in the debate was that “it’s killing regional and small banks. They’re getting hurt.”

First and foremost, the argument that small community banks are being hit by Dodd-Frank are simply not true. There are extensive carve-outs from Dodd-Frank for small, community banks. Here are just four examples out of many:

  • Section 331 of Dodd-Frank changed the formula for deposit insurance assessments so community banks will pay significantly less in premiums. The new formula better reflects the risk an institution poses to the Deposit Insurance Fund (DIF); using total consolidated assets minus tangible equity, rather than simply domestic deposits, will ensure that larger institutions engaged in riskier activities pay more.
  • Section 1022: The CFPB must consult with community banks and credit unions about the impact of proposed rules and to consider the impact of those rules on these institutions. (Dodd-Frank’s language on this is “the potential benefits and costs to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services resulting from such rule;” In this case, “covered person” is defined in Section 1026 of Dodd-Frank as any FDIC-insured bank with $10 million or less in assets, or any insured credit union with $10 million or less in assets.
  • Section 721(a) and 761 Exempted community banks providing swaps as an accommodation to customers from treatment as a swap dealer, and provided SEC and CFTC authority to exempt other smaller entities from regulation under derivatives rules.
  • The Consumer Financial Protection Bureau (CFPB) hired an Assistant Director specifically to serve as the liaison to community banks, credit unions, and small businesses.

But perhaps a more important point, is that it is financial industry’s favorite argument to say that financial reform is hurting small banks. It’s their favorite argument because politicians are wary of associating themselves with them, because they’re so unpopular. So the American Banker’s Association, which is an industry group, will go to the small banks and try to get them to advocate for this or that, so that they can hide the big 5’s agenda behind this mask of the small banks.

Does Dodd-Frank Give TBTF Banks a “Blank Check”?

Another statement made by Governor Romney during the October debate was “I wouldn’t designate five banks as too big to fail and give them a blank check.”

The “blank check” statement is a complete miscategorization. What he’s referring to is the Orderly Liquidation Authority that the FDIC has to take over a failing bank. When the FDIC takes the bank over to liquidate it, by law the FDIC has to do the following:

  • Wipe out shareholders
  • Force creditors to take a hit
  • Fire management and board members
  • And if that weren’t enough, BY LAW the FDIC cannot buy equity in the firm to keep it alive.

This is not a blank check, it’s an immensely long list of stipulations. It’s the prenuptial when you marry a celebrity.

Many question whether or not the FDIC would ever actually use this authority when push came to shove, and it’s an important question (one that came up, haha, on UP today!). But whatever our personal opinions about this are, the market has started to weigh in on its own. And as Mike Konczal highlighted in his blog post, according to a new NY Fed paper, the Order Liquidation Authority, and other Resolution Regimes, has actually led to HIGHER default expectations in the CDS market. What this means is that the market is expecting that the Orderly Liquidation Authority will in fact be used, and it’s trying to factor that in when it determines the right prices for CDS contracts. If this sounds confusing to you, here’s the segment from Up today where we discuss this. Chris does a good job of breaking down what this means into plain english:

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How Can We Go Further in Addressing TBTF?

In these most recent debates, Romney has gone after Too Big To Fail, and Obama has lauded Dodd-Frank. But there is SO MUCH MORE both candidates could be calling for to ensure TBTF is addressed. And they’re not calling for it.

One great example that the candidates could be talking about is the SAFE Banking Act in the Senate (there is also a companion bill in the House). The SAFE Act puts hard caps on bank size, including these:

  • No bank can have more than 10% of all US deposits (For context, as of the end of 2011, Bank of America had 14%)
  • Imposes a 10% leverage limit for large banks. Leverage and leverage rations are a measure of the amount of money you have borrowed against the equity (think: cash) you have on hand.

If either Governor Romney or President Obama were serious about TBTF, why not endorse the SAFE Act? Obama had an opportunity in 2010, when this same idea was advocated in an amendment to Dodd-Frank called Brown-Kaufman. The Obama administration did not support this idea at the time, and the amendment failed. It garnered 33 votes total in the Senate, including the votes of three Republicans.

Where to go to Stay Informed?

Dodd-Frank is a complex bill, with many sections, and it can be hard to try and digest it all at once. Worse still, it is constantly under attack, most often by Republicans but also by Democrats at times. There are two main organizations that I turn to in order to stay up-to-date:

  1. Better Markets, especially their Blog
  2. Americans for Financial Reform

You may also consider following the following people on twitter: Simon Johnson (@baselinescene), Anat Admati (@anatadmati), Cate Long (@cate_long), and Mike Konczal (@rortybomb).

Both Better Markets and Americans for Financial Reform are excellent resources, should you want to be kept updated on the most recent promising reforms, and the most recent attacks on financial reform. Unfortunately, in today’s political climate where the big banks are an oligarchy, the latter is far more common.

I hope this was helpful. Feel free to leave me questions in the comments.

8 Responses to “Dodd-Frank, the Debates, and TBTF”  

  1. 1 Mike Scourby

    this was great, thanks 


    Mike Scourby

  2. 2 Mary

    Thanks so much for sharing your thoughts. Now if only we could arrange for you to take the next debate with Mitt Romney… :)

  3. 3 John Burik

    Alexis, thanks. Reads pretty clear to me, combined with discussion on Up Saturday 10/6. I’l have to follow some of the links you provided but the gist of consumer protections seems to me to be like if I deposit $100, the bank can loan out or invest $95 as long as it keeps five bucks. Is that the basics in earth language?

  4. 4 Benbrodsky

    Now how does common sense begin to influence the public discourse, especially when it comes to Wall Street?

  5. 5 Benbrodsky

    I believe it is a town hall style debate….

  6. 6 Benbrodsky

    I believe it is a town hall style debate….

  7. 7 Arlene Zakhar

    Perhaps the appointment of E. Warren to the Senate Banking Committee will be a plus.  What is the thinking on this?

  8. 8 Anonymous

    If you want to reduce the size of the banks. don’t try to push the rock up the hill.  Change the slope of the hill. Create diminishing returns with size.  Some suggestions.
    Limit interest deductions above a certain amount to increase cost of capital above a certain debt level.  Reduce or eliminate the limited liability of corporations above a certain size (or make it a slippery slope).  Make bank tax rates a function of  leverage (more leverage means a higher tax rate).  Don’t allow pooling of risk.  In theory and practice, slopes (like progressive taxes) work better than limits but are harder to understand and implement.