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

WILMARTH
4/1/2011 1:11 PM
992 OREGON LAW REVIEW [Vol. 89, 951
funding from the capital markets instead of deposits. 163 I supported
the Volcker liabilities cap in my previous article. 164
However, the liabilities cap in section 622 has two significant
exceptions. First, it is subject to a “failing bank” exception (similar to
the “failing bank” loophole in Riegel-Neal), which regulators can
invoke without making any SRD. 165
Second, and more importantly, the liabilities cap is not selfexecuting.
Section 622 requires the Financial Stability Oversight
Council (FSOC) to conduct a study of the potential costs and benefits
of the liabilities cap, including any negative effects on (1) “the
efficiency and competitiveness of U.S. financial firms and financial
markets” and (2) “the cost and availability of credit and other
financial services to [U.S.] households and businesses.” 166 Based on
the results of that study, section 622 directs the FSOC to “make
recommendations regarding any modifications” to the liabilities
cap. 167 Section 622 further requires the FRB to adopt regulations for
the purpose of “implementing” the liabilities cap in accordance with
any “recommendations” by the FSOC for “modifications” of the
cap. 168 Thus, section 622 allows the FRB to weaken (and perhaps
even eliminate) the liabilities cap if the FSOC determines that the cap
would have adverse effects that would outweigh its potential benefits.
LCFIs will almost certainly urge the FSOC and the FRB to weaken
or remove the liabilities cap under section 622. Consequently, it is
questionable whether Dodd-Frank will impose any meaningful new
limit on the growth of LCFIs beyond the statute’s beneficial extension
of the nationwide deposit cap to reach all interstate acquisitions and
mergers involving FDIC-insured institutions.
163 See JOHNSON &KWAK, supra note 137, at 213 (noting that Goldman and Morgan
Stanley each had more than $1 trillion of assets at the end of 2007); Wilmarth, supra note
6, at 749 n.166, 753 n.183 (stating that Goldman and Morgan Stanley relied primarily on
the capital markets for funding, as each firm had less than $70 billion of deposits in 2009,
while Citigroup had $1.8 trillion of assets but only $200 billion of domestic deposits).
164 Wilmarth, supra note 6, at 753.
165 Dodd-Frank Act § 622 (enacting section 14(b) of the BHC Act).
166 Id. (enacting section 14(e) of the BHC Act). The FSOC’s study is also directed to
take account of “financial stability [and] moral hazard in the financial system” in
evaluating the costs and benefits of the liabilities cap. Id.
167 Id. (enacting section 14(e)(1) of the BHC Act).
168 Id. (enacting section 14(d) and (e)(2) of the BHC Act).