Is the Financial Sector Safe Enough Yet?
With the release of a new Treasury report, the US House of Representatives may finally stop pushing for a change to the procedure for restructuring failed banks that would amount to a step backward. Yet, to protect the economy from future mega-bank failures, much more work needs to be done.
CAMBRIDGE – A decade after the global financial crisis, policymakers worldwide are still assessing how best to prevent bank failures from tanking the economy again. Two recent publications – one from the US Department of the Treasury, and another by Federal Reserve economists – provide an indication of where we are.
The US Treasury report examined whether to replace the 2010 Dodd-Frank Act’s regulator-led process for resolving failed mega-banks – the Orderly Liquidation Authority (OLA) – with a solely court-based mechanism. The Treasury’s study was undertaken under instructions from President Donald Trump, who was responding to pressure from several Republican congressional leaders – such as Representative Jeb Hensarling of Texas, the chair of the House Financial Services Committee – who advocate replacing regulators with courts.
Ultimately, while the Treasury extolled the virtues of basic bankruptcy for failed banks, it rejected repealing regulators’ powers to lead bank restructurings. Hensarling expressed deep disappointment with the Treasury’s conclusion, and he and his colleagues continue to insist that Dodd-Frank is an example of inappropriate government meddling that raises the risks of taxpayer-funded bailouts.