Oregon Law Review : Vol. 89, No. 3, p. 951-1058 : The Dodd-Frank Act: A Flawed and Inadequate Response to the Too-Bigto- Fail Problem
Wilmarth, Arthur E. Jr.
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Wilmarth, Arthur E. Jr.
Dodd-Frank does contain useful reforms, including potentially favorable alterations to the supervisory and resolution regimes for large, complex financial institutions (LCFIs) that are designated as systemically important financial institutions (SIFIs). However, this Article concludes that Dodd- Frank’s provisions fall far short of the changes that would be needed to prevent future taxpayer-financed bailouts and to remove other public subsidies for TBTF institutions. As explained below, Dodd- Frank fails to make fundamental structural reforms that could largely eliminate the subsidies currently exploited by LCFIs.Parts II and III of this Article briefly describe the consequences and causes of the financial crisis that led up to the enactment of the Dodd- Frank. As discussed in those sections, LCFIs were the primary private-sector catalysts for the crisis, and they received the lion’s share of support from government programs that were established during the crisis to preserve financial stability. Public alarm over the severity of the financial crisis and public outrage over government bailouts of LCFIs produced a strong consensus in favor of financial reform. That public consensus pushed Congress to enact Dodd- Frank. As Part IV explains, governmental rescues of LCFIs highlighted the economic distortions created by TBTF policies, as well as the urgent need to reduce public subsidies created by those policies. In an article written a few months before Dodd-Frank was enacted, I proposed five reforms that were designed to prevent excessive risk taking by LCFIs and to shrink TBTF subsidies. My proposed reforms would have (1) strengthened existing statutory restrictions on the growth of LCFIs; (2) created a special resolution process to manage the orderly liquidation or restructuring of SIFIs; (3) established a consolidated supervisory regime and enhanced capital requirements for SIFIs; (4) created a special insurance fund, pre-funded by riskbased assessments paid by SIFIs, to cover the costs of resolving failed SIFIs; and (5) rigorously insulated FDIC-insured banks that are owned by LCFIs from the activities and risks of their nonbank affiliates. Part V of this Article compares the relevant provisions of Dodd- Frank to my proposed reforms and evaluates whether the new statute is likely to solve the TBTF problem. Dodd-Frank includes provisions (similar to my proposals) that make potentially helpful improvements in the regulation of large financial conglomerates. The statute establishes a new umbrella oversight body (the Financial Stability Oversight Council) that will designate SIFIs and make recommendations for their regulation. The statute also authorizes the FRB to apply enhanced supervisory requirements to SIFIs. Most importantly, Dodd-Frank establishes a new systemic resolution regime (the Orderly Liquidation Authority (OLA)) that should provide a superior alternative to the choice of “bailout or bankruptcy” that federal regulators confronted when they dealt with failing SIFIs during the financial crisis.