Today the Senate Banking Committee’s Subcommittee on Financial Institutions is holding a hearing on a central question of financial reform – the progress (or lack of it) that has been made on rationalizing the public safety net to ensure that the financial sector doesn’t benefit from inappropriate taxpayer support.
Senator Brown’s hearing deserves wide attention. Considering the trillions of dollars in public support provided by the Federal Reserve to Wall Street and foreign banks over the 2008-2009 period, it’s notable that many Dodd Frank rules designed to limit such support in the future have not gotten much public scrutiny. As the General Accounting Office report to be discussed at the hearing points out, many of these rules have not been completed and their effectiveness remains uncertain. For example, regulators have not even proposed rules for the ‘swaps push out’ provision limiting the public backstop for derivatives dealing at major Wall Street banks, and they have also granted Wall Street a two year extension on any compliance with the law.
Serious questions also remain about whether regulators will be able to limit taxpayer exposure when exercising Dodd-Frank’s proposed new resolution authority for banks of the size and complexity of the largest U.S. ‘too big to fail’ mega-banks. And the Federal Reserve’s proposed implementation of Dodd-Frank limitations on its emergency lending authority – the authority used to distribute those trillions of dollars to global banks during the crisis – would seem to permit a repetition of the kind of indiscriminate public support to Wall Street we saw in response to the financial crisis.
A key lesson of the financial crisis is that the public safety net for the financial system is deeply flawed. Not only did it create inappropriate taxpayer exposure, but the ad hoc bailouts of institutions and individuals responsible for the crisis created dysfunctional incentives for the future. The GAO report highlights how far we still have to go in addressing this problem within the existing framework of the Dodd Frank Act. Senators Brown and Vitter have also suggested another possible next step in their bipartisan TBTF Act – stronger statutory limitations on regulators’ ability to provide safety net assistance to Wall Street.