The Oversight and Investigations Subcommittee continued its review of the Dodd-Frank Act’s failure to end “Too Big to Fail” with a hearing on Wednesday that focused on the Act’s bailout regime.
Although it has been nearly three years since Dodd-Frank became law, relatively little attention has been paid to its so-called “Orderly Liquidation Authority” that proposes to resolve “Too Big to Fail” firms or to the competitive advantages that may accrue to these firms.
“The fact is that Dodd-Frank did not end ‘Too Big to Fail,’ but instead enshrined it. Title II of Dodd-Frank, which created the Orderly Liquidation Authority, made government guarantees for systemically important financial institutions explicit,” Oversight and Investigation Subcommittee Chairman Patrick McHenry (R-NC) said at today’s hearing. “And it is this explicit guarantee that not only provides an unfair advantage to the biggest and most powerful companies and institutions, but in doing so, has the potential to seriously distort our marketplace.”
Witnesses appearing before the Subcommittee today agreed.
“Although the administration and the giant financial institutions themselves have insisted that Too Big to Fail has ended, a growing number of observers are concerned that the Too Big to Fail problem has not been solved at all. Those who hold this view include at least one member of the Board of Governors of the Federal Reserve, Daniel Tarullo, as well as others at the Fed,” said David Skeel, a corporate law professor from the University of Pennsylvania.
John Taylor, professor at Stanford University and a senior fellow in economics at the Hoover Institution, noted in his testimony that rather than end bailouts for “Too Big to Fail” firms, large financial institutions under Dodd-Frank “still seem to be enjoying a huge subsidy on their borrowing costs due to market expectations of bailouts.”
“This expectation of bailout of some creditors increases the risk of financial instability,” Taylor said.
Skeel said this expectation also enables large financial institutions “to borrow money much more cheaply than other financial institutions, because their cost of credit is artificially reduced by the Too Big to Fail subsidy.”
This subsidy puts small and medium sized banks that are most likely to lend to small and medium sized businesses “at a particular disadvantage,” Skeel added.