Has the passing of H.R. 3312: Systemic Risk Designation Improvement Act 2017 come and gone under the radar or was I sleeping? There has been a lot of “chaff” to wade through since the passing of the Tax Reform Bill.
However, the passing of the reform of the Dodd-Frank Act through the House financial services committee last Wednesday seems important enough, so I dug into it.
History of H.R. 3312: Systemic Risk Designation Improvement Act 2017
Using Stephen S. Cohen and J. Bradford DeLong’s DW-NOMINATE (dynamic-weight nominal three-step estimation) that employs transitivity to make comparisons across Congress/Senate, we can forecast will a high degree of accuracy whether or not the bill will pass altogether.
For isntance, if legislator B almost always votes to the right of A in one Congress, and C and B serve in another Congress in which A is absent, but C almost always votes to the right of B.C will be assigned an ideal point to the right of A; the replacement of A by C will have moved the party’s (and the Congress’s) average score to the right.
Via Journal of Economic Literature, Vol. LV (December 2017).
The Republican Policy Committee
On Wednesday, December 20, 2017, the House will consider H.R. 3312, the Systemic Risk Designation Improvement Act of 2017 under a closed rule. The bill was introduced on July 19, 2017, by Rep. Blaine Luetkemeyer (R-MO) and was referred to the House Committee on Financial Services, which ordered the bill reported by a vote of 47-12 on October 12, 2017.
H.R. 3312 amends Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act to remove the $50 billion asset threshold used to automatically designate individual financial institutions as “systemically important financial institutions” (SIFIs) and instead subject’s the institutions to enhanced regulatory standards based on the institution’s activities.
Specifically the bill, allows the Financial Stability Oversight Council (FSOC) to subject bank holding companies to enhanced supervision and standards by the Federal Reserve, if they have been designated as a global systemically important bank (G-SIB), or if the Federal Reserve has determined that the material financial distress, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the individual bank holding company, could pose a threat to the financial stability of the United States.
The bill also requires bank holding companies that have not been subject to a final determination, to continue to pay an assessment that is currently imposed on SIFIs, and that is used to carry out enhanced supervision and regulation of those companies by the Federal Reserve.
The Financial Stability Oversight Council (FSOC) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which authorized them “to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies (BHCs) or nonbank financial companies, or that could arise outside the financial services marketplace; [and] to respond to emerging threats to the stability of the United States financial system.” This authority allows the FSOC to designate non-bank institutions as SIFIs, and subject them to increased supervision and regulation by the Federal Reserve.
The Dodd-Frank Act also creates an automatic designation for bank holding companies with more than $50 billion in assets as “systemically important financial institutions” (SIFIs) and requires the Federal Reserve to apply enhanced prudential standards to those bank holding companies. No factor outside of the arbitrary $50 billion asset threshold is required for designation as a SIFI. The enhanced prudential standards established by the Federal Reserve must be more stringent than those standards applicable to other bank holding companies. Examples of these enhanced prudential standards include capital risk management requirements, stress testing requirements, capital planning requirements, liquidity standards, and resolution planning, or “living will,” requirements.
H.R. 3312 would repeal the automatic designation for bank holding companies with over $50 billion in assets as SIFIs and instead requires the financial regulators to review an institution’s size, interconnectedness, substitutability, global cross-jurisdictional activity, and complexity before a determination is made to require enhanced supervision.
According to the bill’s sponsor, “This legislation supports economic growth throughout the country because it will free commercial banks to make loans while allowing financial regulators the ability to apply enhanced standards on banks based on the actual risk posed to the financial system—rather than on arbitrary asset size alone. An inefficient regulatory system based on an arbitrary threshold can have real economic consequences.”
The Congressional Budget Office (CBO) estimates that enacting the legislation would increase net direct spending by $53 million and increase revenues by $10 million over the next 10 years, leading to a net increase in the deficit of $43 million over the 2018-2027 period.