July 21, 2015
Shelby Delivers Speech at The Heritage Foundation
WASHINGTON, DC – Tuesday, July 21, 2015 – U.S. Senator Richard Shelby (R-Ala.), Chairman of the United States Senate Committee on Banking, Housing, and Urban Affairs, today delivered a speech on regulatory reform and too-big-to-fail at The Heritage Foundation.
The text of Chairman Shelby’s remarks, as prepared, is below.
“Thank you for inviting me to speak today on regulatory reform and more specifically, whether too-big-to-fail is a thing of the past.
“I have long held and publicly stated that I do not believe that any commercial institution, financial or otherwise, should be too-to-fail. The mere concept in a free market economy is repugnant and indefensible.
“If a firm is considered to be too-big-to-fail it will by default be viewed differently in the market place and be given preferential treatment at the expense of smaller firms. This is anti-competitive and undemocratic.
“It is also inefficient, creating serious negative consequences for the U.S. economy and ultimately for American taxpayers.
“Allocating resources through government subsidies rather than through free markets encourages activities and risks that would not be undertaken without government support.
“Failure is a part of capitalism, and those businesses that choose to take excessive risks should be allowed to fail. More importantly, they should know that failure is an option - an option without recourse.
“Bailouts are the root of moral hazard in the financial system, encouraging banks to get even bigger and take even greater risks.
“In addition, too-big-to-fail policies, and the bailouts that result from them, can be applied unfairly, effectively deciding which companies will rescued and which will be allowed to fail.
“During the financial crisis, the Fed bailed out Bear Stearns, but not Lehman Brothers.
“It gave Bank of America extra incentives and financial support to acquire a failing Merrill Lynch.
“And yet, Citigroup’s stock price fell from $57 to less than one dollar before the Fed bailed it out.
“AIG received three separate bailouts, causing the government to own almost 80 percent of the company.
“As former Fed Chairman Paul Volcker cautioned during the financial crisis, the Fed took ‘actions that extend the very edge of its lawful and implied powers, transcending certain long-embedded principles and practices.’
“In fact, a recent Federal court ruling held that the Fed went beyond the limits of its lawful powers when it bailed out AIG.
“It is clear that many mistakes were made before, during and after the financial crisis.
“For example, legislation claiming to end too-big-to-fail and to address the root causes of the crisis has done just the opposite.
“Instead of reducing systemic risk, Dodd-Frank has actually encouraged the biggest banks to become larger and more concentrated.
“It has put in place a structure where Main Street banks and other financial companies that had nothing to do with the crisis are treated as if they caused it.
“Dodd-Frank changed financial regulation in sweeping ways, including creating a council to monitor systemic risk, a new office to attempt to measure it, and a process to designate companies as ‘systemically important.’
“But, it has fallen far short of the ultimate goal of actually reducing risk in the system.
“The current regulatory framework assumes that too-big-to-fail is both automatic and unavoidable, instead of asking what it can do to reduce systemic risk.
“When I asked Treasury Secretary Lew at a recent hearing whether he thought it would be good to have fewer systemically significant financial institutions, I was surprised that his answer was not a resounding ‘yes.’
“Shouldn’t this be the goal of Dodd-Frank – especially considering those who support it claim that it has ended too-big-to-fail?
“The Financial Regulatory Improvement Act of 2015, which was reported out of the Banking Committee in May, addresses this important issue by giving financial institutions regulatory incentives to reduce systemic risk.
“Dodd-Frank imposed an arbitrary $50 billion asset threshold for determining which banks are systemically important, placing Main Street and regional banks in the same category of regulation as Wall Street banks.
“By comparison, the Financial Regulatory Improvement Act directs regulators to analyze the systemic risk posed by each bank above $50 billion and regulate it based on the bank’s individual risk profile.
“More importantly, it incentivizes financial institutions to reduce risk by giving them a path to shed this designation.
“I believe that less systemic risk is a good thing. That does not mean, however, that we should have a system devoid of risk.
“Risk is a necessary part of our system, but our regulatory structure should encourage less risk to the entire system. That is the goal of the Financial Regulatory Improvement Act.
“Too-big-to-fail is far from dead. We can, however, take meaningful steps to ensure a safer financial system and thereby reduce the probability of taxpayer bailouts in the future. Thank you.”
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