Two Ways Trump Could End Too Big To Fail

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Robert Donachie Capitol Hill and Health Care Reporter
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President Donald Trump has been using executive orders to push his deregulation and financial reform agenda, but there are two alternative avenues available to him to achieve key wins in this arena.

Over the course of his first month in office, Trump has targeted $181 billion-worth of Obama-era regulations with executive orders. One of Trump’s key campaign promises was to dismantle the “disaster,” or 2,300 page Dodd-Frank Act. While he has previously used orders to begin chipping away at Dodd-Frank, Trump could try working through the Treasury or the Oval Office to significantly scale back associated financial regulations.

1. Direct The Treasury Secretary To End “Too Big To Fail”

The Dodd-Frank Act created the Financial Stability Oversight Council (FSOC) — a 10-member panel of expert regulators that includes the secretary of the Treasury and the chairman of the Federal Reserve — to identify risks and respond to emerging threats to overall financial stability. Dodd-Frank authorizes the FSOC to designate firms as “systematically important” financial institutions (SIFI). Companies given this designation are deemed by the FSOC as “too big to fail,” a term used to describe banks during the 2008 financial crisis that were considered for the world economy too big and too risky to permit collapse.

President Trump could work to end the practice of “too big to fail” by calling for the Treasury secretary to conduct an extensive review of the designation process.

“The President could issue an executive order or, instead, a simple policy directive to the Treasury Secretary,” Norbert Michel, research fellow for The Heritage Foundation, tells The Daily Caller News Foundation. “The Treasury Secretary essentially has veto power over these systemic decisions, and the Treasury is an executive agency, not an independent agency.”

Dodd-Frank attempted to shift the burden of major financial mistakes from taxpayers to market participants, ensuring those who partake in risky investment practices would bear the financial burden of their mistakes.

Effectively, banks were being required by federal regulators to hold excess capital reserves to guard against large market failures. These capital requirements are not explicitly laid out in Dodd-Frank, but are set by the Federal Reserve Bank and federal regulators. (RELATED: Trump To Repeal Dodd-Frank) 

One of the externalized costs, or unintended effects, of Dodd-Frank is that banks are holding more reserves, and not lending out money to businesses or consumers. It is estimated that the top six U.S. banks hold $101.57 billion in capital above what is required by federal regulators for them to set aside. If regulations were tapered back, banks could very well return all, or some, of these excess reserves to investors — a prospect shareholders would assuredly welcome.

2. Drop The Metlife Appeal By The Obama Administration

The Obama administration slapped four companies with SIFI label during his eight years in office. Only one firm, MetLife, fought the designation. MetLife won its lawsuit in the District Court of Columbia, with the judge ruling that the FSOC’s designation of MetLife was “unreasonable,” and relied on process that was “fatally flawed.”

The Obama administration quickly appealed the decision, claiming that some $900 billion in assets and liabilities should be under the federal government’s watch because of the potential risks associated with a bank failure. Troubling for MetLife is that two out of the three judges serving on the appeal case were appointed by Obama.

The Trump administration can stop this appeal in its tracks. Trump can act similarly to the first approach, “because the Department of Justice is not an independent agency,” Michel tells TheDCNF. “The defendant is listed as the FSOC, but the DOJ’s lawyers are arguing the case. Dropping the appeal would send a strong statement to markets and Congress, not just regulators, because it would amount to accepting the previous ruling.”

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