The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act inadequately addressed the too-big-to-fail problem. Many of the Act’s components actually increase the government’s chance of using taxpayer money to save troubled financial institutions rather than allowing these institutions to file for bankruptcy. One example is the creation of the Financial Stability Oversight Council. The council was established to ensure that another financial collapse like the one in 2008 will not happen again. However, the council actually increases the regulatory burden on private-sector companies, picks winners and losers for future bailouts, and expands the Fed’s regulatory reach to non-financial institutions.
Title I of Dodd–Frank established the 15-member Financial Stability Oversight Council, a multi-regulator council tasked with identifying risks to the financial stability of the United States. This council should be eliminated.
- The 10 voting seats are filled by the heads of federal regulatory agencies; the Treasury and the Federal Reserve hold two of the key voting positions.
- The council has a broad, poorly defined main purpose: to protect the U.S. economy from threats to financial stability. The council can require new regulations for any financial company for virtually any reason related to the financial stability of the U.S.
- Dodd–Frank essentially created a committee of regulators with the power to impose new regulations on companies despite the fact that nearly all large financial firms were federally regulated before the 2008 crisis.
- Companies have virtually no recourse to challenge the council’s decisions.
- Certain companies, commonly referred to as systemically important financial institutions (SIFIs), are singled out for future taxpayer bailouts.
- The council’s existence increases bailout expectations by minimizing the extent to which potential losses figure into managers’ decisions—consequently, managers will be more likely to undertake greater financial risks.
- The council expands the authority of the Federal Reserve for special regulatory supervision over certain non-bank financial companies.
- Congress should eliminate the Financial Stability Oversight Council.
For more information, see The Heritage Foundation Backgrounder: The Financial Stability Oversight Council: Helping to Enshrine “Too Big to Fail”