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

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WILMARTH 4/1/2011 1:11 PM 1006 OREGON LAW REVIEW [Vol. 89, 951 and drown. Instead, we want to be sure his hands are free—too bail. 226 Similarly, Cheryl Block has concluded that “despite all the . . . ‘no more taxpayer-funded bailout’ clamor included in recent financial reform legislation, bailouts in the future are likely if circumstances become sufficiently severe.” 227 Accordingly, it seems probable that future Congresses will loosen or remove Dodd-Frank’s constraints on TBTF bailouts, or will permit federal regulators to evade those limitations, whenever such actions are deemed necessary to prevent failures of SIFIs that could destabilize our financial system. 228 C. Dodd-Frank Subjects SIFIs to Consolidated Supervision and Enhanced Prudential Standards, but Those Provisions Are Not Likely to Prevent Future Bailouts of SIFIs Dodd-Frank authorizes the FRB to obtain reports from and examine nonbank SIFIs and their subsidiaries. 229 Dodd-Frank also provides the FRB with authority to take enforcement actions (including cease-and-desist orders, civil money penalty orders, and orders removing directors and officers) against nonbank SIFIs and their subsidiaries. 230 Thus, Dodd-Frank provides the FRB with consolidated supervision and enforcement authority over nonbank SIFIs comparable to the FRB’s umbrella supervisory and enforcement 226 Adam J. Levitin, In Defense of Bailouts, 99 GEO. L.J. 435, 439 (2011). 227 Block, supra note 127, at 224; see also id. at 227 (“pretending that there will never be another bailout simply leaves us less prepared when the next severe crisis hits”). 228 See Levitin, supra note 226, at 489 (“If an OLA proceeding would result in socially unacceptable loss allocations, it is likely to be abandoned either for improvised resolution or for the statutory framework to be stretched . . . to permit outcomes not intended to be allowed.”). 229 In obtaining reports from and making examinations of a nonbank SIFI and its subsidiaries, the FRB is required (1) to use “to the fullest extent possible” reports and supervisory information provided by the primary financial regulator of any subsidiary depository institution or other functionally regulated subsidiary (e.g., a securities brokerdealer or an insurance company) and (2) to coordinate with the primary regulator of any such subsidiary. Dodd-Frank Act § 161. 230 In order to take an enforcement action against any depository institution subsidiary or functionally regulated subsidiary of a nonbank SIFI, the FRB must first recommend that the primary financial regulator should bring an enforcement proceeding against the designated subsidiary. The FRB may initiate an enforcement action if the primary regulator does not take action with sixty days after receiving the FRB’s recommendation. Dodd-Frank Act § 162(b).
WILMARTH 4/1/2011 1:11 PM 2011] The Dodd-Frank Act 1007 powers with respect to BHCs and financial holding companies (FHCs). 231 Dodd-Frank requires the FRB (either on its own motion or on the FSOC’s recommendation) to adopt enhanced prudential standards for nonbank SIFIs and large BHCs “[i]n order to prevent or mitigate risks to the financial stability of the United States.” 232 The enhanced standards must be “more stringent” than the ordinary supervisory rules that apply to nonbank financial companies and BHCs that are not SIFIs. 233 At a minimum, Dodd-Frank requires the FRB to adopt enhanced risk-based capital requirements, leverage limits, liquidity requirements, overall risk management rules, risk concentration limits, and requirements for resolution plans (“living wills”) and credit exposure reports. 234 In addition, the FRB may, in its discretion, require SIFIs to satisfy contingent capital requirements, enhanced public disclosures, short-term debt limits, and additional prudential standards. 235 Dodd-Frank’s requirements for consolidated supervision and stronger prudential standards for SIFIs are generally consistent with proposals contained in my previous article on financial regulatory reform. 236 In that article, I gave particular attention to the idea of requiring SIFIs to issue contingent capital in the form of convertible subordinated debt. The contingent capital concept would require such debt to convert automatically into common stock upon the occurrence of a designated event of financial stress, such as (1) a decline in a SIFI’s capital below a specified level that would “trigger” an automatic conversion or (2) the initiation of the special resolution process for a SIFI. One advantage of contingent capital is that the SIFI’s common equity would be increased (due to the mandatory conversion of subordinated debt) at a time when the SIFI was under 231 See S. REP. NO. 111-176, at 53–54, 83–85 (2010); see also CARNELL ET AL., supra note 118, at 437–74 (discussing the FRB’s authority to regulate BHCs and FHCs under the BHC Act). 232 Dodd-Frank Act § 165(a); see also id. § 115 (authorizing the FSOC to recommend that the FRB should adopt various types of enhanced prudential standards for nonbank SIFIs and large BHCs). 233 Id. § 161(a)(1)(A), (d). 234 Id.§ 165(b)(1)(A). 235 § 165(b)(1)(B). The FRB may not impose a contingent capital requirement on nonbank SIFIs or large BHCs until the FSOC completes a study of the potential costs and benefits of such a requirement. Id. §§ 115(c), 165(c)(1). 236 Wilmarth, supra note 6, at 757–61.
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