{ "id": "R42150", "type": "CRS Report", "typeId": "REPORTS", "number": "R42150", "active": true, "source": "EveryCRSReport.com, University of North Texas Libraries Government Documents Department", "versions": [ { "source": "EveryCRSReport.com", "id": 585566, "date": "2018-09-24", "retrieved": "2018-09-25T13:07:59.852515", "title": "Systemically Important or \u201cToo Big to Fail\u201d Financial Institutions", "summary": "Although \u201ctoo big to fail\u201d (TBTF) has been a long-standing policy issue, it was highlighted by the financial crisis, when the government intervened to prevent the near-collapse of several large financial firms in 2008. Financial firms are said to be TBTF when policymakers judge that their failure would cause unacceptable disruptions to the overall financial system. They can be TBTF because of their size or interconnectedness. In addition to fairness issues, economic theory suggests that expectations that a firm will not be allowed to fail create moral hazard\u2014if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm\u2019s riskiness because they are shielded from the negative consequences of those risks. If so, TBTF firms could have a funding advantage compared with other banks, which some call an implicit subsidy.\nThere are a number of policy approaches\u2014some complementary, some conflicting\u2014to coping with the TBTF problem, including providing government assistance to prevent TBTF firms from failing or systemic risk from spreading; enforcing \u201cmarket discipline\u201d to ensure that investors, creditors, and counterparties curb excessive risk-taking at TBTF firms; enhancing regulation to hold TBTF firms to stricter prudential standards than other financial firms; curbing firms\u2019 size and scope, by preventing mergers or compelling firms to divest assets, for example; minimizing spillover effects by limiting counterparty exposure; and instituting a special resolution regime for failing systemically important firms. A comprehensive policy is likely to incorporate more than one approach, as some approaches are aimed at preventing failures and some at containing fallout when a failure occurs. \nParts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) address each of these policy approaches. For example, it created an enhanced prudential regulatory regime administered by the Federal Reserve for non-bank financial firms designated as \u201csystemically important\u201d (SIFIs) by the Financial Stability Oversight Council (FSOC) and banks with more than $50 billion in assets. The Economic Growth, Regulatory Relief, and Consumer Protection Act (P.L. 115-174) raised this threshold to $250 billion in assets, but gave the Federal Reserve discretion to apply individual provisions as needed to banks between $100 billion and $250 billion in assets. Thirteen U.S. bank holding companies and a larger number of foreign banks have more than $250 billion in assets, and FSOC designated three insurers (AIG, MetLife, and Prudential Financial) and GE Capital as systemically important. MetLife\u2019s designation was subsequently rescinded by a court decision, and AIG\u2019s and GE Capital\u2019s designations were rescinded by FSOC. A handful of the largest banks face additional capital, leverage, and liquidity requirements stemming from Basel III, an international agreement. The Dodd-Frank Act also allowed FSOC to designate payment, clearing, and settlement systems as systemically important \u201cfinancial market utilities\u201d (FMUs) that are subject to enhanced prudential regulation.\nThe Dodd-Frank Act also created the \u201corderly liquidation authority\u201d (OLA), a special resolution regime administered by the Federal Deposit Insurance Corporation (FDIC) to take into receivership failing firms that pose a threat to financial stability. This regime has not been used to date, and has some similarities to how the FDIC resolves failing banks. Statutory authority used to prevent financial firms from failing during the crisis has either expired or been narrowed by the Dodd-Frank Act. \nThe fact that most large firms have grown in dollar terms since the enactment of the Dodd-Frank Act has led some critics to question whether the TBTF problem has been solved and propose more far-reaching solutions, such as repealing parts of the Dodd-Frank Act, breaking up the largest banks, or restoring Glass-Steagall. Others argue that systemic risk regulation should focus on risky financial activities, regardless of firm size. (Fannie Mae and Freddie Mac remain in government conservatorship and have not been addressed by legislation to date.)", "type": "CRS Report", "typeId": "REPORTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "http://www.crs.gov/Reports/R42150", "sha1": "15ae36c9d62227610cd9dda51da772ce5b09c5a1", "filename": "files/20180924_R42150_15ae36c9d62227610cd9dda51da772ce5b09c5a1.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "http://www.crs.gov/Reports/pdf/R42150", "sha1": "d6deafbcf28347cac190a8c78f2daa582f222926", "filename": "files/20180924_R42150_d6deafbcf28347cac190a8c78f2daa582f222926.pdf", "images": {} } ], "topics": [ { "source": "IBCList", "id": 4803, "name": "Financial Stability" }, { "source": "IBCList", "id": 4891, "name": "Federal Reserve & Monetary Policy" } ] }, { "source": "EveryCRSReport.com", "id": 461607, "date": "2017-05-26", "retrieved": "2018-05-10T13:20:59.052707", "title": "Systemically Important or \u201cToo Big to Fail\u201d Financial Institutions", "summary": "Although \u201ctoo big to fail\u201d (TBTF) has been a long-standing policy issue, it was highlighted by the financial crisis, when the government intervened to prevent the near-collapse of several large financial firms in 2008. Financial firms are said to be TBTF when policymakers judge that their failure would cause unacceptable disruptions to the overall financial system. They can be TBTF because of their size or interconnectedness. In addition to fairness issues, economic theory suggests that expectations that a firm will not be allowed to fail create moral hazard\u2014if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm\u2019s riskiness because they are shielded from the negative consequences of those risks. If so, TBTF firms could have a funding advantage compared with other banks, which some call an implicit subsidy.\nThere are a number of policy approaches\u2014some complementary, some conflicting\u2014to coping with the TBTF problem, including providing government assistance to prevent TBTF firms from failing or systemic risk from spreading; enforcing \u201cmarket discipline\u201d to ensure that investors, creditors, and counterparties curb excessive risk-taking at TBTF firms; enhancing regulation to hold TBTF firms to stricter prudential standards than other financial firms; curbing firms\u2019 size and scope, by preventing mergers or compelling firms to divest assets, for example; minimizing spillover effects by limiting counterparty exposure; and instituting a special resolution regime for failing systemically important firms. A comprehensive policy is likely to incorporate more than one approach, as some approaches are aimed at preventing failures and some at containing fallout when a failure occurs. \nParts of the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203) address all of these policy approaches. For example, it created an enhanced prudential regulatory regime administered by the Federal Reserve for non-bank financial firms designated as \u201csystemically important\u201d (SIFIs) by the Financial Stability Oversight Council (FSOC) and banks with more than $50 billion in assets. Over 30 U.S. bank holding companies and a larger number of foreign banks have more than $50 billion in assets, and FSOC designated three insurers (AIG, MetLife, and Prudential Financial) and GE Capital as systemically important. MetLife\u2019s designation was subsequently rescinded by a court decision, and GE Capital\u2019s was rescinded by FSOC. A handful of the largest banks face additional capital, leverage, and liquidity requirements stemming from Basel III, an international agreement. The Dodd-Frank Act also allowed FSOC to designate payment, clearing, and settlement systems as systemically important \u201cfinancial market utilities\u201d (FMUs) that are subject to enhanced prudential regulation.\nThe Dodd-Frank Act also created the \u201corderly liquidation authority\u201d (OLA), a special resolution regime administered by the Federal Deposit Insurance Corporation (FDIC) to take into receivership failing firms that pose a threat to financial stability. This regime has not been used to date, and has some similarities to how the FDIC resolves failing banks. Statutory authority used to prevent financial firms from failing during the crisis has either expired or been narrowed by the Dodd-Frank Act. The fact that most large firms have grown in dollar terms since the enactment of the Dodd-Frank Act has led some critics to question whether the TBTF problem has been solved and propose more far-reaching solutions, such as breaking up the largest banks or restoring Glass-Steagall. (Fannie Mae and Freddie Mac remain in government conservatorship and have not been addressed by legislation to date.)\nThe Financial CHOICE Act (H.R. 10) would amend or repeal several Dodd-Frank provisions. It would repeal the Volcker Rule and the designation of non-bank SIFIs and FMUs. Banks that elected to meet a 10% leverage ratio would no longer be subject to Dodd-Frank or Basel III enhanced prudential regulations. It would repeal OLA and replace it with a new chapter in the bankruptcy code for financial firms. It would repeal the Treasury\u2019s and the FDIC\u2019s ability to provide emergency support and would restrict the Fed\u2019s ability to provide emergency assistance.", "type": "CRS Report", "typeId": "REPORTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "http://www.crs.gov/Reports/R42150", "sha1": "0a868bfa17d56b3145cd93ed3b4b8b5e71f5e485", "filename": "files/20170526_R42150_0a868bfa17d56b3145cd93ed3b4b8b5e71f5e485.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "http://www.crs.gov/Reports/pdf/R42150", "sha1": "074d7e0692ba8bfbe04f8e2438c0ef271585dee2", "filename": "files/20170526_R42150_074d7e0692ba8bfbe04f8e2438c0ef271585dee2.pdf", "images": {} } ], "topics": [ { "source": "IBCList", "id": 4803, "name": "Financial Stability" }, { "source": "IBCList", "id": 4891, "name": "Federal Reserve & Monetary Policy" } ] }, { "source": "EveryCRSReport.com", "id": 458057, "date": "2017-01-04", "retrieved": "2017-01-13T15:45:31.842686", "title": "Systemically Important or \u201cToo Big to Fail\u201d Financial Institutions", "summary": "Although \u201ctoo big to fail\u201d (TBTF) has been a long-standing policy issue, it was highlighted by the financial crisis, when the government intervened to prevent the near-collapse of several large financial firms in 2008. Financial firms are said to be TBTF when policymakers judge that their failure would cause unacceptable disruptions to the overall financial system. They can be TBTF because of their size or interconnectedness. In addition to fairness issues, economic theory suggests that expectations that a firm will not be allowed to fail create moral hazard\u2014if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm\u2019s riskiness because they are shielded from the negative consequences of those risks. If so, TBTF firms could have a funding advantage compared with other banks, which some call an implicit subsidy.\nThere are a number of policy approaches\u2014some complementary, some conflicting\u2014to coping with the TBTF problem, including providing government assistance to prevent TBTF firms from failing or systemic risk from spreading; enforcing \u201cmarket discipline\u201d to ensure that investors, creditors, and counterparties curb excessive risk-taking at TBTF firms; enhancing regulation to hold TBTF firms to stricter prudential standards than other financial firms; curbing firms\u2019 size and scope, by preventing mergers or compelling firms to divest assets, for example; minimizing spillover effects by limiting counterparty exposure; and instituting a special resolution regime for failing systemically important firms. A comprehensive policy is likely to incorporate more than one approach, as some approaches are aimed at preventing failures and some at containing fallout when a failure occurs. \nParts of the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203) address all of these policy approaches. For example, it created an enhanced prudential regulatory regime administered by the Federal Reserve for non-bank financial firms designated as \u201csystemically important\u201d (SIFIs) by the Financial Stability Oversight Council (FSOC) and banks with more than $50 billion in assets. Over 30 U.S. bank holding companies and a larger number of foreign banks have more than $50 billion in assets, and FSOC designated three insurers (AIG, MetLife, and Prudential Financial) and GE Capital as systemically important. MetLife\u2019s designation was subsequently rescinded by a court decision, and GE Capital\u2019s was rescinded by FSOC. A handful of the largest banks face additional capital, leverage, and liquidity requirements stemming from Basel III, an international agreement. \nThe Dodd-Frank Act also created the \u201corderly liquidation authority\u201d (OLA), a special resolution regime administered by the Federal Deposit Insurance Corporation (FDIC) to take into receivership failing firms that pose a threat to financial stability. This regime has not been used to date, and has some similarities to how the FDIC resolves failing banks. Statutory authority used to prevent financial firms from failing during the crisis has either expired or been narrowed by the Dodd-Frank Act. The fact that most large firms have grown in dollar terms since the enactment of the Dodd-Frank Act has led some critics to question whether the TBTF problem has been solved. (Fannie Mae and Freddie Mac remain in government conservatorship and have not been addressed by legislation to date.)\nLegislative proposals amending these Dodd-Frank Act provisions include repealing or modifying the designation process for non-bank SIFIs, the $50 billion threshold for banks, the Volcker Rule, and the Fed\u2019s Section 13(3) authority to provide emergency assistance to non-banks. Another proposal would repeal OLA and replace it with a new chapter in the bankruptcy code for financial firms. Others would reinstate provisions of the Glass-Steagall Act that prohibit a firm from undertaking both commercial and investment banking.", "type": "CRS Report", "typeId": "REPORTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "http://www.crs.gov/Reports/R42150", "sha1": "5a35fc9d8de89eb1dc756a927620def884e0b0ab", "filename": "files/20170104_R42150_5a35fc9d8de89eb1dc756a927620def884e0b0ab.html", "images": null }, { "format": "PDF", "encoding": null, "url": "http://www.crs.gov/Reports/pdf/R42150", "sha1": "b07091beb321d0a2a2f087390ce156c43df41e5a", "filename": "files/20170104_R42150_b07091beb321d0a2a2f087390ce156c43df41e5a.pdf", "images": null } ], "topics": [ { "source": "IBCList", "id": 4803, "name": "Financial Stability" }, { "source": "IBCList", "id": 4891, "name": "Federal Reserve & Monetary Policy" } ] }, { "source": "EveryCRSReport.com", "id": 442701, "date": "2015-06-30", "retrieved": "2016-04-06T18:51:47.991593", "title": "Systemically Important or \u201cToo Big to Fail\u201d Financial Institutions", "summary": "Although \u201ctoo big to fail\u201d (TBTF) has been a longstanding policy issue, it was highlighted by the near-collapse of several large financial firms in 2008. Financial firms are said to be TBTF when policymakers judge that their failure would cause unacceptable disruptions to the overall financial system, and they can be TBTF because of their size or interconnectedness. In addition to fairness issues, economic theory suggests that expectations that a firm will not be allowed to fail create moral hazard\u2014if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm\u2019s riskiness because they are shielded from the negative consequences of those risks. If so, they could have a funding advantage compared with other banks, which some call an implicit subsidy.\nThere are a number of policy approaches\u2014some complementary, some conflicting\u2014to coping with the TBTF problem, including providing government assistance to prevent TBTF firms from failing or systemic risk from spreading; enforcing \u201cmarket discipline\u201d to ensure that investors, creditors, and counterparties curb excessive risk-taking at TBTF firms; enhancing regulation to hold TBTF firms to stricter prudential standards than other financial firms; curbing firms\u2019 size and scope, by preventing mergers or compelling firms to divest assets, for example; minimizing spillover effects by limiting counterparty exposure; and instituting a special resolution regime for failing systemically important firms. A comprehensive policy is likely to incorporate more than one approach, as some approaches are aimed at preventing failures and some at containing fallout when a failure occurs. \nParts of the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203) address all of these policy approaches. For example, it created an enhanced prudential regulatory regime administered by the Federal Reserve for non-bank financial firms designated as \u201csystemically important\u201d by the Financial Stability Oversight Council (FSOC) and banks with more than $50 billion in assets. About 30 U.S. bank holding companies and a larger number of foreign banks have more than $50 billion in assets, and the FSOC has designated three insurers (AIG, MetLife, and Prudential Financial) and GE Capital as systemically important. A handful of the largest banks face additional capital, leverage, and liquidity requirements. \nThe Dodd-Frank Act also created a special resolution regime administered by the Federal Deposit Insurance Corporation (FDIC) to take into receivership failing firms that pose a threat to financial stability. This regime has not been used to date, and has some similarities to how the FDIC resolves failing banks. Statutory authority used to prevent financial firms from failing during the crisis has either expired or been narrowed by the Dodd-Frank Act. The fact that most large firms have grown in dollar terms since the enactment of the Dodd-Frank Act has led some critics to question whether the TBTF problem has been solved.\nIn the 114th Congress, S. 1484 would increase the $50 billion asset threshold to $500 billion for enhanced regulation under Title I of the Dodd-Frank Act. Banks with assets between $50 billion and $500 billion would be subject to a designation process by FSOC. Compared with the current non-bank designation process, S. 1484 would require FSOC to provide more information to (bank or non-bank) institutions and give them more opportunities to take actions to avoid or reverse systemically important financial institution (SIFI) designation. It would also increase public disclosure requirements surrounding the designation process. S.Con.Res. 11, the FY2016 budget resolution, creates a nonbinding deficit-neutral budget reserve fund that allows for future legislation \u201crelating to any bank holding companies with over $500 billion in total assets to better protect taxpayers.... \u201d", "type": "CRS Report", "typeId": "REPORTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "http://www.crs.gov/Reports/R42150", "sha1": "61d76fa74e8908c6729e513f0eae2b4bd0062f19", "filename": "files/20150630_R42150_61d76fa74e8908c6729e513f0eae2b4bd0062f19.html", "images": null }, { "format": "PDF", "encoding": null, "url": "http://www.crs.gov/Reports/pdf/R42150", "sha1": "3b1a303660bc28a96580b9482bb03eb67d59134c", "filename": "files/20150630_R42150_3b1a303660bc28a96580b9482bb03eb67d59134c.pdf", "images": null } ], "topics": [ { "source": "IBCList", "id": 237, "name": "Monetary Policy and the Federal Reserve" }, { "source": "IBCList", "id": 3451, "name": "Financial Market Regulation" } ] }, { "source": "University of North Texas Libraries Government Documents Department", "sourceLink": "https://digital.library.unt.edu/ark:/67531/metadc462511/", "id": "R42150_2014Sep19", "date": "2014-09-19", "retrieved": "2014-12-05T09:57:41", "title": "Systemically Important or \"Too Big to Fail\" Financial Institutions", "summary": "This report discusses the economic issues raised by \"too big to fail\" (TBTF), the historical experience with TBTF before and during the financial crisis of the 2000s, broad policy options, and policy changes made by the relevant Dodd-Frank provisions.", "type": "CRS Report", "typeId": "REPORT", "active": false, "formats": [ { "format": "PDF", "filename": "files/20140919_R42150_981030174d50171a0a42769a5ba83f40608aad09.pdf" }, { "format": "HTML", "filename": "files/20140919_R42150_981030174d50171a0a42769a5ba83f40608aad09.html" } ], "topics": [ { "source": "LIV", "id": "Economic policy", "name": "Economic policy" }, { "source": "LIV", "id": "Financial institutions", "name": "Financial institutions" }, { "source": "LIV", "id": "Securities industry", "name": "Securities industry" }, { "source": "LIV", "id": "Investment banking", "name": "Investment banking" }, { "source": "LIV", "id": "Institutional investments", "name": "Institutional investments" } ] }, { "source": "University of North Texas Libraries Government Documents Department", "sourceLink": "https://digital.library.unt.edu/ark:/67531/metadc462939/", "id": "R42150_2014Aug08", "date": "2014-08-08", "retrieved": "2014-12-05T09:57:41", "title": "Systemically Important or \"Too Big to Fail\" Financial Institutions", "summary": "This report discusses the economic issues raised by \"too big to fail\" (TBTF), the historical experience with TBTF before and during the financial crisis of the 2000s, broad policy options, and policy changes made by the relevant Dodd-Frank provisions.", "type": "CRS Report", "typeId": "REPORT", "active": false, "formats": [ { "format": "PDF", "filename": "files/20140808_R42150_8b4c0fe713441b446176f29fbcc3ba13e41e14d6.pdf" }, { "format": "HTML", "filename": "files/20140808_R42150_8b4c0fe713441b446176f29fbcc3ba13e41e14d6.html" } ], "topics": [ { "source": "LIV", "id": "Economic policy", "name": "Economic policy" }, { "source": "LIV", "id": "Financial institutions", "name": "Financial institutions" }, { "source": "LIV", "id": "Securities industry", "name": "Securities industry" }, { "source": "LIV", "id": "Investment banking", "name": "Investment banking" }, { "source": "LIV", "id": "Institutional investments", "name": "Institutional investments" } ] }, { "source": "University of North Texas Libraries Government Documents Department", "sourceLink": "https://digital.library.unt.edu/ark:/67531/metadc227743/", "id": "R42150_2013Jun19", "date": "2013-06-19", "retrieved": "2013-11-05T18:07:05", "title": "Systemically Important or \"Too Big to Fail\" Financial Institutions", "summary": "Report that discusses the economic issues raised by \"too big to fail\" (TBTF), the historical experience with TBTF before and during the financial crisis of the 2000s, broad policy options, and policy changes made by the relevant Dodd-Frank provisions.", "type": "CRS Report", "typeId": "REPORT", "active": false, "formats": [ { "format": "PDF", "filename": "files/20130619_R42150_86dffe2b1ec707aff4a2c0cd2a5f7b13b6eff5cf.pdf" }, { "format": "HTML", "filename": "files/20130619_R42150_86dffe2b1ec707aff4a2c0cd2a5f7b13b6eff5cf.html" } ], "topics": [ { "source": "LIV", "id": "Economic policy", "name": "Economic policy" }, { "source": "LIV", "id": "Financial institutions", "name": "Financial institutions" }, { "source": "LIV", "id": "Securities industry", "name": "Securities industry" }, { "source": "LIV", "id": "Investment banking", "name": "Investment banking" }, { "source": "LIV", "id": "Institutional investments", "name": "Institutional investments" } ] } ], "topics": [ "Economic Policy" ] }