Question

1. What is the connection between systemic risk and too-big-to fail?
2. Your boss asked you to make an elevator speech explaining Dodd-Frank to your colleagues. Write that speech. Facts only; no opinions!
3. As a member of Congress, would you support strong Dodd-Frank regulations or vote to repeal it? Would you support a return to Glass-Steagall? Explain fully.

Answer 1

1. What is the connection between systemic risk and too-big-to fail?
2. Your boss asked you to make an elevator speech explaining Dodd-Frank to your colleagues. Write that speech. Facts only; no opinions!
3. As a member of Congress, would you support strong Dodd-Frank regulations or vote to repeal it? Would you support a return to Glass-Steagall? Explain fully.

Sources:

1. Public Sources of Dodd-Frank
2. Wall Street Journal
3. US Treasury, Minutes and (FOMC) Various Years
4. Senate Debates, Various Years
5. C Todd Thomson: US Comptroller of the Currency

1. The accepted definition of Systemic Risk is the likelihood that an event(s) at the company level could trigger severe collapse of an entire industry or economy,

These institutions are large relative to their respective industries or make up a significant part of the overall economy. A company highly interconnected with others is also a source of systemic risk.

However, if, an only if, the entire collapse of an industry would not necessarily catastrophically impact the economy is not necessarily deemed Too Big To Fail (TBTF).

I posit, as was demonstrated in the Financial Crisis of 2008 that companies with a cascading impact has a contagion effect on the US/National economy and indeed the global economy, must be deemed as TBTF

Too big to fail (TBTF) is a phrase used to describe a company that's so entwined in the global economy that its failure would be catastrophic.

This would mean mass unemployment that will have a contagion effect on politics, “people power”, civil wars and even political upheaval and revolutions. The catastrophic effect would alter both the economic and political landscape permanently and can take generations to recover, if at all.

Big doesn't refer to the size of the company, but rather it's involvement across multiple economies and geographies

The (TBTF) problem was indeed a serious concern during the financial crisis. Mitigating its effects is one of the most critical challenges facing policymakers and legislators today.

The TBTF problem is now an acknowledged issue in banking regulation, but the problem was formally used in a comment by Congressman McKinney when C. Todd Conover, the US Comptroller of the Currency, testified before Congress on the $4.5 billion government rescue of the money centre bank, Continental Illinois.

Key impact:

{The rescue package protected all of Continental’s creditors, even though only 10 per cent of its $30 billion deposits were insured (Financial Crisis Inquiry Commission, 2010). Congressman McKinney remarked that: ‘” we have a new kind of bank. It is called too big to fail, and it is a wonderful bank.’ In the wake of Mr Conover’s testimony, a further 11 banks were identified in the Wall Street Journal as TBTF}.

The phrase (TBTF) (as opposed a firm with systemic risk that would impact only that sector), applies more precisely to institutions whose uninsured creditors and depositors are protected by the regulatory authorities and, hence, by the taxpayer (US Treasury, 1991).

When a TBTF bank receives taxpayer support, it is because the regulatory authorities believe that its failure could impose severe negative externalities upon other economic actors.

Hence, a very large bank may be a ‘systemically important financial institution’, or SIFI.

In summary, Systemic Risk and TBTB are two expressions are not synonymous; while many SIFIs are systemically important by virtue of their size, size is neither a necessary nor sufficient condition for a firm to be a SIFI (C. Todd Thomson, 2009)

2. Dodd – Frank Act

Facts:

The Dodd-Frank Act of 2010, fully known as (Dodd-Frank Wall Street Reform and Consumer Protection Act), introduced an enormous set of new laws that are supposed to prevent another Great Recession from occurring by tightly regulating key financial institutions to limit systemic risk.

Key Point:

{The Dodd-Frank Wall Street Reform and Consumer Protection Act targeted the sectors of the financial system that were believed to have caused the 2008 financial crisis, including banks, mortgage lenders, and credit rating agencies.}

Salient Features

1. Financial stability

The Financial Stability Oversight Council and Orderly Liquidation Authority monitor the financial stability of major financial firms whose failure could have a serious negative impact on the U.S. economy (companies deemed "too big to fail").

The law also provides for liquidations or restructurings via the Orderly Liquidation Fund, established to assist with the dismantling of financial companies that have been placed in receivership and prevent tax dollars from being used to prop up such firms. 

2. Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau (CFPB), was given the job of preventing predatory mortgage lending (reflecting the widespread sentiment that the subprime mortgage market was the underlying cause of the 2008 catastrophe) and make it easier for consumers to understand the terms of a mortgage before agreeing to them.

3. The Volcker Rule

Another key component of Dodd-Frank, the Volcker Rule, restricts the ways banks can invest, limiting speculative trading, and eliminating proprietary trading. Banks are not allowed to be involved with hedge funds or private equity firms, which are considered too risky.

The act also contains a provision for regulating derivatives, such as the credit default swaps that were widely blamed for contributing to the 2008 financial crisis.

4. SEC Office of Credit Ratings

Because credit rating agencies were accused of contributing to the financial crisis by giving out misleadingly favourable investment ratings, Dodd-Frank established the SEC Office of Credit Ratings. The office is charged with ensuring that agencies provide meaningful and reliable credit ratings of the businesses, municipalities, and other entities they evaluate.9



5. Whistle-blower program

Dodd-Frank also strengthened and expanded the existing whistle-blower program promulgated by the Sarbanes-Oxley Act (SOX). Specifically, it established a mandatory bounty program under which whistle-blowers can receive from 10% to 30% of the proceeds from a litigation settlement

3. I would support amendment so Dodd Frank by reviving the Glass Steagull Act of 1933 and modifying it for the present time.

There are both critics but also amendments to the Dodd-Frank Act pursuant to Donald J Trump’s ascension to the POTUS that has revived the Glass Steagull Act of 1933

Some issues with advocates of the Dodd-Frank believed the act would prevent the economy from experiencing a crisis like that of 2008 and protect consumers from many of the abuses that contributed to the crisis.

Detractors have argued that the act could harm the competitiveness of U.S. firms relative to their foreign counterparts. They contend that its regulatory compliance requirements unduly burden community banks and smaller financial institutions—even though they played no role in causing the financial crisis. Further, these detractors contend. The Act also reduces liquidity in the world’s primary stock and banking market

The higher reserve requirements under Dodd-Frank mean banks must keep a higher percentage of their assets in cash, which decreases the amount they are able to hold in marketable securities. In effect, this limits the bond market-making role that banks have traditionally undertaken. With banks unable to play the part of a market maker, prospective buyers are likely to have a harder time finding counteracting sellers. More importantly, prospective sellers may find it more difficult to find counteracting buyers.

Both are right and a compromise needs be addressed. I would support amendment so Dodd Frank by reviving the Glass Steagull Act of 1933 and modifying to the present time.

In essence, In the wake of the financial crisis of 2008-09, interest in reviving the Glass-Steagall Act or passing similar bank-regulating legislation to protect consumers needs to be made explicitly without stymieing the competitiveness of those banks, especially in relation to EU banks and their global ambitions.

Salient features of the Glass Steagull Act

{The 1933 Glass-Steagall Act draws a distinction between banking industry and the investment industry, forbidding a financial institution to be both a bank and a brokerage,}.

The TBTF theory brings into sharp contrast how the Bulge Bracket banks got that big in the first place.

After repealing the Glass Steagull act in 1999, a sense still remains that muting the act has allowed U.S. financial institutions to become too big—TBTF , in fact—too reckless with client funds, and too untrustworthy to police themselves. And that some tougher regulation might again be called for.

The Volcker Rule in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, implemented in 2015, essentially reinstated some of Glass-Steagall's Section 20 provisions: E

Ergo: It prohibits banks from certain trading activities with their own accounts and limits their investments in highly speculative assets, like hedge funds.

n 2015, senators, including John McCain and Elizabeth Warren, initiated a draft for a bill for the "21st Century Glass-Steagall Act." (The bill would institute a separation of traditional banking from investment banks, hedge funds, insurance, and private equity activities, within a five-year transition period. This would ideally make the institutions more secure for depositors and mitigate the risk of another government bailout.

Critics of the "21st Century Glass-Steagall Act” mainly focus on an argument of political theatre and assert this is skews the US tards “Socialism”

But surely the bail-out of the financial institutions in 2008 that protected society because Banks were TBTF, nothing but socialism?