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

WILMARTH
4/1/2011 1:11 PM
954 OREGON LAW REVIEW [Vol. 89, 951
crisis revealed fundamental weaknesses in the financial regulatory
systems of the United States, the United Kingdom, and other
European nations. Those weaknesses have made regulatory reforms
an urgent priority. Publicly funded bailouts of “too big to fail”
(TBTF) financial institutions during the crisis provided indisputable
proof that TBTF institutions benefit from large explicit and implicit
public subsidies, including the expectation that such institutions will
receive comparable public support during future emergencies. TBTF
subsidies undermine market discipline and distort economic
incentives for large, complex financial institutions (LCFIs) that are
viewed by the financial markets as likely to qualify for TBTF
treatment. 5 Accordingly, as I argued in a recent article, a primary
objective of regulatory reforms must be to eliminate (or at least
greatly reduce) TBTF subsidies, thereby forcing LCFIs to internalize
the risks and costs of their activities. 6
In July 2010, Congress passed and President Obama signed the
Dodd-Frank Wall Street Reform and Consumer Protection Act. 7
Dodd-Frank’s preamble proclaims that one of the statute’s primary
purposes is “to end ‘too big to fail’ [and] to protect the American
taxpayer by ending bailouts.” 8 As he signed Dodd-Frank, President
Obama declared, “Because of this law, . . . [t]here will be no more
taxpayer-funded bailouts. Period.” 9
Dodd-Frank does contain useful reforms, including potentially
favorable alterations to the supervisory and resolution regimes for
LCFIs that are designated as systemically important financial
institutions (SIFIs). However, this Article concludes that Dodd-
Frank’s provisions fall far short of the changes that would be needed
to prevent future taxpayer-financed bailouts and to remove other
public subsidies for TBTF institutions. As explained below, Dodd-
Frank fails to make fundamental structural reforms that could largely
eliminate the subsidies currently exploited by LCFIs.
5 As used in this Article, the term “large, complex financial institution” (LCFI) includes
major commercial banks, securities firms, and insurance companies, as well as “universal
banks” (i.e., financial conglomerates that have authority to engage, either directly or
through affiliates, in a combination of banking, securities, and insurance activities). See
Wilmarth, supra note 4, at 968 n.15.
6 Arthur E. Wilmarth, Jr., Reforming Financial Regulation to Address the Too-Big-to-
Fail Problem, 35 BROOK.J.INT’L L. 707 (2010). Portions of this Article are adapted from
that previous article.
7 H.R. 4173, 111th Cong. (2010).
8 Id. pmbl.; accord S. REP.NO. 111-176, at 1, 4–6 (2010).
9 See Kaper, supra note 2.