CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
1042 OREGON LAW REVIEW [Vol. 89, 951
their nonbank affiliates the safety net subsidy provided by the banks’
low-cost, FDIC-insured deposits. 395
Dodd-Frank limits the authority of the FRB to issue orders or rules
granting future waivers or exemptions under sections 23A and 23B
because it requires the FRB to act with the concurrence of the OCC
and the FDIC (with respect to waivers granted by orders for national
banks) or the FDIC alone (with respect to waivers granted by orders
for state banks or exemptions granted by regulation for any type of
bank). 396 Even so, it is unlikely that the OCC or the FDIC would
refuse to concur with the FRB’s proposal for a waiver under
conditions of financial stress. Accordingly, Dodd-Frank does not
ensure that the restrictions on affiliate transactions in sections 23A
and 23B will be adhered to in a crisis setting.
In contrast, my proposal for second-tier narrow banks would
replace sections 23A and 23B with an absolute rule. That rule would
completely prohibit any extensions of credit or other transfers of
funds by second-tier banks to their nonbank affiliates (except for
lawful dividends paid to parent holding companies). That rule would
also bar federal regulators from approving any such transactions
between narrow banks and their nonbank affiliates. An absolute bar
on affiliate transactions is necessary to prevent either LCFIs or federal
regulators from using the low-cost funding advantages of FDICinsured
banks to provide backdoor bailouts to nonbank affiliates.
Second, as discussed above, Congress should repeal the “systemic
risk exception” (SRE) currently included in the FDI Act. By
repealing the SRE, Congress would require the FDIC to follow the
395 Wilmarth, supra note 120, at 456–57, 472–73 (discussing the FRB’s waiving section
23A restrictions so major banks could make large loans to their securities affiliates
following the terrorist attacks on September 11, 2001); Ashcraft et al., supra note 214, at
563–64, 564 n.22, 575 n.34 (explaining that, after the subprime financial crisis began in
August 2007, the FRB granted exemptions from section 23A restrictions to six major U.S.
and foreign banks—Bank of America, Citigroup, Chase, Barclays, Deutsche, and RBS—
so those banks could provide loans to support their securities affiliates); Transactions
Between Member Banks and Their Affiliates: Exemption for Certain Purchases of Asset-
Backed Commercial Paper by a Member Bank from an Affiliate, 74 Fed. Reg. 6226 (Feb.
6, 2009) (adopting rules to be codified at 12 C.F.R. §§ 223.42(o), 223.56(a)) (announcing
the FRB’s approval of blanket waivers of sections 23A and 23B to “increase the capacity”
of banks to purchase ABCP from affiliated MMMFs, and declaring that such waivers—
which were originally granted in September 2008—were justified “[i]n light of ongoing
dislocations in the financial markets, and the impact of such dislocations on the
functioning of ABCP markets and on the operation of [MMMFs]”).
396 Dodd-Frank Act § 608(a)(4) (amending 12 U.S.C. § 371c(f)); id. § 608(b)(6)
(amending 12 U.S.C. § 371c-1(e)(2)).