Fed Governor Powell discusses how Dodd-Frank ends ‘too big to fail’

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Created on Monday, 04 March 2013 17:18

In a speech today in Washington, Federal Reserve Board Governor Jerome Powell discussed how regulators are moving forward to implement portions of the Dodd-Frank Act that were designed to eliminate the notion of “too big to fail.”  He shared a pragmatic perspective about the effectiveness of the Orderly Liquidation Authority and other legal capabilities, such as living wills, included in Dodd-Frank to ensure that taxpayers will never again be asked to bailout a failing institution.  During his speech, Powell said, “the current reforms are promising and should be given time to work,” which they most certainly should. 

Below are highlighted excerpts from his speech:

On too big to fail:

• “The market needs to believe--and it needs to be the case--that every private financial institution can fail and be resolved under our laws without imposing undue costs on society. The current reform agenda is designed to accomplish just that, through two channels. First, it is intended to substantially reduce the likelihood of failure through a broad range of stronger regulation, including higher capital and liquidity standards, stress tests and recovery planning among other reforms. Second, it is intended to minimize the externalities from failure by making it possible to resolve a large financial institution without taxpayer exposure and without uncontainable disruption. If these reforms achieve their purpose, in my view they would be preferable to a government-imposed break-up, which would likely involve arbitrary judgments, efficiency losses, and a difficult transition”

• “Some of the criticism argues that Dodd-Frank--particularly the OLA mechanism-- enshrines taxpayer bailouts. I do not believe that it does. OLA requires by its terms that the losses of any financial company placed into FDIC receivership be borne by the private sector stockholders and creditors of the firm. Single point of entry can work without exposing taxpayers to loss.” 

• “As we developed the [special resolution regime] simulation, however, I came around to the view that it is possible to resolve a large, global financial institution. What changed my mind was the FDIC's innovative "single-point-of-entry" approach, which was just coming into focus in 2011. This approach is a classic simplifier, making theoretically possible something that seemed impossibly complex.”

• “It seems to me that efforts by U.S. and global regulators to fight too big to fail are generally on the right track. The Basel III and Dodd-Frank reforms designed to reduce the probability of failure of large banking firms are sensible and, for the most part, targeted at the causes of the crisis. They are being implemented thoughtfully and effectively.  And I believe that those Financial Stability Board and Dodd-Frank reforms designed to permit the resolution of systemic firms without taxpayer exposure or undue disruption are very promising.”

• “In Titles I and II of Dodd-Frank, Congress has given the regulators a game plan for ending too big to fail. The regulators, including the Federal Reserve, are forcefully implementing the plan we have been given.   My own view is that the framework of current reforms is promising, and should be given time to work.”

On safety and soundness of the financial sector:

• “Much has been done since the crisis to strengthen the regulation of large banking organizations. The highlights would begin with the Basel III capital and liquidity reforms, including the graduated risk-based capital surcharges for globally systemic financial firms. These reforms are in the process of implementation in the United States and elsewhere.  In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) imposes on the largest financial institutions enhanced prudential standards and also requires central clearing of derivatives.  And banking regulators have implemented enhanced supervisory measures such as stress testing and recovery planning.”

• “Today, risk-based capital and leverage ratios for banks of all sizes have improved materially since 2009 and are significantly above their levels in the years preceding the crisis. The banking sector overall also has substantially improved its liquidity position over the past few years. The system is undeniably stronger than before the crisis.^”

To read the full speech please click: HERE

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