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Paul Ryan wants to repeal rules meant to stop Too Big to Fail

at 11:42 AM ET, 03/20/2012

On financial regulation, Paul Ryan’s 2013 budget basically cuts-and-pastes its recommendations from last year: it wants to repeal parts of Dodd-Frank that give new power to federal regulators to break up big banks, arguing that the regulations actually make bailouts more likely, not less so. Ryan isn’t proposing an alternative, however, so his plan to repeal the government’s new “resolution authority” would bring us back to the pre-Dodd Frank era — which was also, of course, the era in which bank bailouts proved necessary.
(Richard Drew - AP)

Under Wall Street reform, financial institutions that are deemed “systemically significant” are subject to a host of new regulations, including a new rule that requires them to submit “living wills” that explain what would happen if the firm went belly up. They’re required to submit such plans to the Federal Deposit Insurance Corporation, which has new authority to help liquidate troubled firms so as to avoid systemic catastrophe and prompt taxpayer bailouts.

The Ryan budget, however, would actually repeal the FDIC’s new resolution authority, arguing that it would have the opposite effect of what’s intended by allowing bank regulators “to access taxpayer dollars in order to bail out the creditors of large, ‘systemically significant’ financial institutions.” By doing so, Ryan says he would “end the regime now enshrined into law that paves the way for future bailouts.”

His blueprint doesn’t go into much further detail to explain why this is the case. But other critics of Dodd-Frank have argued that it could enable the FDIC to take control of failing firms and rely on taxpayer funds to keep the systemically important parts running through a government-run “bridge” financial company. That’s likely why Ryan believes the cost of the new resolution authority could far exceed the Congressional Budget Office’s $26 billion estimate.

While outside analysts across the political spectrum have shared Ryan’s concerns that Dodd-Frank doesn’t do enough to stop Too Big to Fail, their specific worry is often quite different than Ryan’s: they’re worried that bank regulators have too little authority, not too much, to quickly take down failing firms. It’s unclear, for example, how swiftly and forcefully the FDIC would use the new rules to liquidate a highly troubled, systemically important firm.

Repealing that authority as Ryan proposes eliminates a new government channel for intervention, but it wouldn’t explicitly prohibit future bailouts, which could become more likely if systemically risky banks aren’t wound down in an orderly fashion.

That said, it’s also worth noting that the Ryan budget doesn’t call for an all-out repeal of Dodd-Frank. Instead, it calls for lawmakers to “review” the new regulations, emphasizing that “the federal government has a critical role in helping to ensure financial markets are fair and transparent, and in holding accountable those who violate the rules.”

 
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