Does Dodd-Frank have teeth after all?
by. Henry Meier
Just how big a deal is the announcement late yesterday afternoon that the Federal Reserve Board and the FDIC have rejected the so-called “living wills” drawn up by the nation’s 11 largest financial institutions as inadequate to ensure that they can be liquidated in a cost effective manner? Depending on what happens next it could be like Vladimir Putin saying “I’m sorry” to the Ukrainians and giving them back Crimea, Tiger Woods suddenly getting healthy and winning the next five majors, or Congress actually passing meaningful legislation.
Dodd-Frank required systemically important banks to submit bankruptcy plans that explain to the Federal Reserve and the FDIC how their liquidation can be executed in bankruptcy court in the event they fail. Previous submissions have been accepted by regulators without amendment. But, yesterday, the Fed and FDIC told the 11 largest banks, each with more than $250 billion in assets, to go back to the drawing board and credibly demonstrate how they can fail without putting the American taxpayer on the hook.
The ostensible Dodd-Frank logic is that these plans will prevent the American public from extending an implicit guarantee to the behemoths that they are too big to fail. The statute provides that, in the event these plans are deficient, regulators can order these institutions to sell some of their assets and adhere to higher capital standards. But, as this recent exchange between Fed Chairman Yellen and Massachusetts Senator Warren demonstrates, it didn’t seem that regulators was taking these living wills seriously. Now they are or at least pretending like they are. The real test will be when the adjusted plans are resubmitted. If they don’t include asset divestitures than they aren’t serious proposals. But, the banks involved may be willing to gamble that, despite yesterday’s announcement, regulators will never force them to restructure their monstrosities. Time will tell.
Why does it matter? Because if credit unions have to comply with Dodd-Frank it isn’t asking too much for a financial system to be put in place that prevents the banking system from getting sucked down another sinkhole anytime soon and taking credit unions down with it.
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