DFA Making Gains on TBT (June 29)

Mike & Co. —

Late this afternoon, the Federal Reserve announced the results of its second round of stress tests – the CCAR.  These tests authorize the banks that pass them to move forward with their plans to raise dividend payments or buy back stock.

Earlier in the day, the FSOC announced  that GE Capital will be the first SIFI firm to lose its designation without the help of a court ruling.  Below we cover GE Capital’s de-designation, a ramp-up of the MetLife court battle, and a look at what it all means for candidates supporting or defending Dodd-Frank.

Best,

Dana

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Assorted Amici
Several leading lights among Democrats filed an amicus brief with the D.C. Circuit Court of Appeals last week, in which they argued that Judge Collyer’s decision in the MetLife case incorrectly interpreted the FSOC’s Congressional mandate to categorize financial institutions as systemically important.  According to the brief, the district court “fundamentally misunderstand[s]” the FSOC’s structure, and “the district court’s ruling, if upheld, would fundamentally undermine the program that Congress put in place when it enacted Dodd-Frank.”

Amici include Nancy Pelosi, Harry Reid, Sherrod Brown, Elizabeth Warren, former Sen. Chris Dodd and former Rep. Barney Frank — 20 current and former Democratic lawmakers signed on to the brief in all.

Separately, Fed Chairmen Ben Bernanke and Paul Volcker filed an amicus brief in support of the government saying that “a major consequence” of Collyer’s decision “is that one of the world’s largest, most highly interconnected financial institutions is left with inadequate oversight, and FSOC’s central mission of identifying and addressing future threats to financial stability is substantially undermined.”

SIFI No Longer

The FSOC announced today that it held a vote earlier this week to rescind GE Capital’s designation as a systemically important financial institution, ending GE’s year-long process of winding down its complex and sizeable financial services firm.

This all began in April 2015, when GE said that it would seek to have its status changed by selling off most of GE Capital, what was then its $500 billion lending business and one of the largest banking businesses in the U.S.

Treasury Secretary Jacob Lew, who chairs the council, said the change shows that designation is a “two-way process”—a rebuttal to critics who have said its process for branding “systemic” firms is opaque and doesn’t give firms a clear road map on how to reduce risk.  It is also a rebuke of the strategy used by MetLife, which chose to fight its designation in court rather than address the concerns of regulators.

To be clear, GE Capital’s pathway to losing its SIFI designation is not an easy one for other SIFIs to follow – it chose to essentially break itself apart.  Other SIFIs are very different companies compared to GE Capital, bringing with them different risk profiles, lines of business, and activities.  As a roadmap for other SIFIs to follow, GE Capital’s progress leaves something to be desired.

Court Cases vs. Business Changes  

GE Capital’s rescinded SIFI designation is just the most recent incident in a long history of DFA successes, and it defies logic that events like this aren’t recognized for what they are: good regulations working effectively to minimize risks to the economy.

GOP leaders and rank-and-file may continue to rabble rouse, to blame DFA for creating a slow recovery, for limiting economic growth, for tying the hands of banks and lenders, but it is all for naught.  The truth is that Dodd-Frank works, has worked for some time, and will continue to work in the future.

The increasingly institutionalized operation and the measurable effect of Dodd-Frank was on display once again when today’s CCAR results were announced.   The U.S. units of Deutsche Bank AG and Banco Santander SA were the only firms of 31 tested that failed in 2015 and have once again been singled out as the only failing banks for 2016.  30 other firms passed through, though Morgan Stanley will be required to address some capital weaknesses in a Q4 update to its plan.

Attacking the law, calling for its repeal (à la Trump) and dismissing its progress and success don’t do any good.  Democrats themselves have admitted that there are parts of Dodd-Frank they’d like to tweak, but rather than take them up on that offer and working to improve the law, Republicans would rather use DFA as a soapbox for stirring up populist anger

That is why it critical that Democrats remain aware of and continue to tout the gains made regularly to tame TBTF – be it GE Capital shrinking its way out of SIFI status or having every bank pass the first round of 2016 stress tests.

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