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

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 1021
resolution costs. Even if the FDIC ultimately repays the borrowed
funds by imposing ex post assessments on surviving SIFIs, the public
and the financial markets will correctly infer that the federal
government (and, ultimately, the taxpayers) provided bridge loans to
pay the creditors of failed SIFIs. 295
Second, under Dodd-Frank’s post-funded OLF, the most reckless
SIFIs will effectively shift the potential costs of their risk taking to the
most prudent SIFIs because the latter will be more likely to survive
and bear the ex post costs of resolving their failed peers. Thus, a
post-funded OLF is undesirable because “firms that fail never pay and
the costs are borne by surviving firms.” 296
Third, a pre-funded OLF would create beneficial incentives that
would encourage each SIFI to monitor other SIFIs and to alert
regulators of excessive risk taking by those institutions. Every SIFI
would know that the failure of another SIFI would deplete the SRIF
and would also trigger future assessments that it and other surviving
SIFIs would have to pay. Thus, each SIFI would have good reason to
complain to regulators if it became aware of unsound practices or
conditions at another SIFI. 297
Fourth, the payment of risk-based assessments to pre-fund the OLF
would reduce TBTF subsidies for SIFIs by forcing them to internalize
more of the “negative externality” (i.e., the potential public bailout
295 Bair FCIC Testimony, supra note 276, at 38–39; see also Cheyenne Hopkins,
Resolution Fund New Reg Reform Headache, AM. BANKER, Nov. 12, 2009, at 1 (quoting
observation by Doug Elliott, a fellow at the Brookings Institution, that pre-funding a
systemic resolution fund would be advantageous “because you can start funding while the
institutions are still strong . . . [while] if you do it after the fact you are almost certain to do
it when institutions are weak and less funds are available”); Gordon & Muller, supra note
200, at 41 (observing that, under Dodd-Frank, “[r]esolution funds will be borrowed from
Treasury and ultimately, the taxpayers. Politically, this will likely register as a taxpayer
‘bailout,’ notwithstanding the [statute’s] strong repayment mandate”).
296 Bair FCIC Testimony, supra note 276, at 38–39. During the conference
committee’s deliberations on Dodd-Frank, House Democratic conferees unsuccessfully
pushed for a pre-funded OLF. See supra note 279 and accompanying text. In warning
against the dangers of a post-funded OLF, Representative Gregory Meeks observed:
What kind of system are we promoting if the biggest risk takers now know that
they won’t have to pitch in for the cleanup because they will be out of business
and [will] have run off with the accrued . . . profits from the good days, while
those who are more prudent and survive the crises are left holding the tab for . . .
their wild neighbors.
Conference Committee Transcript, supra note 279 (remarks of Rep. Meeks).
297 Wilmarth, supra note 6, at 763.