GAO Report: Financial Crisis Losses and the Potential Impact of the Dodd-Frank Act (with (i) Lofchie Comment and (ii) GAO Excerpts)
The GAO published a report which examined whether or not the Dodd-Frank Act will lower systemic risk and reduce the possibility or severity of a future crisis. The report proved largely inconclusive.
According to the report, the increased regulation of complex financial instruments and the enhanced supervision over financial giants, with the possibility of liquidation if they pose a systemic risk, has led some experts to believe that Dodd-Frank will reduce the losses associated with a future crisis. Others, however, speculate that Dodd-Frank's effectiveness depends largely on the rulemaking of regulators and the responses of financial firms. At the same time, many experts doubt that it will be of any help whatsoever.
The report states that federal agencies currently face a situation in which they are required to expend substantial resources to accomplish their newly created responsibilities, with little or no congressional appropriations. Compliance costs on financial institutions and restrictions on their business products may reduce risks to the financial system, which - as the report suggests - may come at the expense of the firm's clientele, as some firms pass the increased costs onto their customers.
Cross-Reference(s): Dodd-Frank Titles I ("Financial Stability"), VI("Improvements to Regulation of Bank and Savings Association Holding Companies Depository Institutions") and X ("Bureau of Consumer Financial Protection").
Lofchie Comment: We are spending hundreds of millions of dollars and further damaging our economy to implement a regulatory scheme that regulates financial products and arrangements that had limited relationship to the causes of the financial crisis. Among the effects of this regulation will be the creation of new financial entities that will concentrate credit risk to an unprecedented degree and that will be too big to fail. See also my comments in yesterday's news: House Financial Services Committee Oversight Plan for Financial Regulation (with Lofchie Comment).
GAO Excerpts: A few sample passages:GAO's remarks on the cost of bailing out financial institutions (page 29): "Although the financial performance of the federal government’s assistance to the financial sector can be measured in different ways, most of the federal government’s major programs earned accounting income in excess of accounting losses and the net losses for some interventions are expected to be small relative to the overall increase in the federal debt. For example, the Federal Reserve reported that all loans made under its emergency programs that have closed were repaid with interest and does not project any losses on remaining loans outstanding. Under FDIC’s TLGP, program participants, which included insured depository institutions and their holding companies, paid fees on debt and deposits guaranteed by the program; these fees created a pool of funds to absorb losses. According to FDIC data, as of November 30, 2012, FDIC had collected $11.5 billion in TLGP fees and surcharges, and this amount is expected to exceed the losses from the program."Benefits of Dodd-Frank to safety and soundness (page 33): "We found no clear consensus on the extent to which, if at all, the Dodd-Frank Act will help reduce the probability or severity of a future financial crisis."Not clear why we have this extensive system of swaps regulation (page 48): "Except for credit default swaps (CDS) - a type of derivative used to hedge or transfer credit risk - other over-the-counter (OTC) swaps and derivative contracts generally were not central to the systemwide problems encountered during the financial crisis, according to FSOC."Clearinghouses for swaps are not so safe (page 52): "At the same time, experts have pointed out that clearinghouses concentrate credit risk and thus represent a potential source of systemic risk. For example, a former regulatory official told us that, in her opinion, clearinghouses essentially are too big to fail, given that the Dodd-Frank Act includes provisions mandating centralized clearing of standardized swaps and authorizing the Federal Reserve to provide emergency liquidity to systemically important clearinghouses provided certain conditions are met."
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