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

WILMARTH
4/1/2011 1:11 PM
1022 OREGON LAW REVIEW [Vol. 89, 951
cost) of their activities. 298 To accomplish the goal of internalizing
risk, the marginal rates for OLF assessments should become
progressively higher for SIFIs that create a greater potential for
systemic risk, based on factors such as size, complexity, opacity and
interconnectedness with other SIFIs. A pre-funded OLF with
appropriately calibrated risk-based assessments would reduce moral
hazard among SIFIs and would shield governments and taxpayers
from at least “first loss” exposure for the cost of resolving future
failures of SIFIs. 299
Gordon and Muller point out that a pre-funded OLF would also
reduce TBTF subsidies by making Dodd-Frank’s “liquidation threat
more credible.” 300 In their view, a pre-funded OLF would encourage
regulators to “impos[e] an FDIC receivership” on a failing SIFI. 301 In
contrast, Dodd-Frank’s post-funded OLF creates a strong incentive
for regulators to grant forbearance in order to avoid or postpone the
politically unpopular step of borrowing from the Treasury to finance a
failed SIFI’s liquidation. 302
To further reduce the potential TBTF subsidy for SIFIs, the OLF
should be strictly separated from the DIF, which insures bank
deposits. As discussed above, the “systemic-risk exception” (SRE) in
the FDI Act is a potential source of bailout funds for SIFI-owned
banks, and those funds could indirectly support creditors of SIFIs. 303
The FDIC relied on the SRE when it jointly agreed with the Treasury
Department and the FRB to provide more than $400 billion of asset
guarantees to Citigroup and Bank of America. 304 Dodd-Frank now
298 Viral V. Acharya et al., Regulating Systemic Risk, in RESTORING FINANCIAL
STABILITY, supra note 34, at 283, 293–95.
299 Wilmarth, supra note 6, at 762–3; see also Acharya et al., supra note 298, at 293–
95.
300 Gordon & Muller, supra note 200, at 55.
301 Id.
302 Id. at 55–56; see also id. at 41 (contending that Dodd-Frank’s post-funded OLF will
encourage regulators to “delay putting a troubled financial firm into receivership”).
303 See supra notes 207–09 and accompanying text.
304 See Press Release, Joint Statement by Treasury, Federal Reserve and the FDIC on
Citigroup (Nov. 23, 2008), available at http://www.fdic.gov/news/news/pres/2008
/pr08125.html; FDIC Chairman Sheila C. Bair, Statement on Bank of America Acquisition
of Merrill Lynch before the House Comm. on Oversight and Government Reform and the
Subcomm. on Domestic Policy (Dec. 11, 2009), available at http://www.fdic.gov/news
/news/speeches/archives/2009/spdec1109.html. Although the terms of the asset guarantee
for Bank of America were agreed to in principle, they were never finalized, and the
Treasury Secretary did not formally invoke the SRE for Bank of America. See FIN.CRISIS
INQUIRY COMM’N, supra note 122, at 32.