Senator Sherrod Brown (D-OH) and Representative Maxine Waters (D-CA) asserted that the rescission by the Financial Stability Oversight Council (“FSOC”) of the systemically important financial institution (“SIFI”) designation of the General Electric Capital Corporation (“GECC”) proves that “FSOC is working just as Wall Street Reform intended: to protect working Americans from once again bailing out ‘too-big-to fail’ institutions.”
In a joint statement, the legislators asserted that SIFIs must choose between emphasizing oversight or stability:
The Council’s action shows that “systemically important” firms have a clear choice between stricter oversight or reducing their threat to taxpayers and financial stability.
Lofchie Comment: Facts belie the legislators’ political assertion that Dodd-Frank has had the effect of shrinking big firms and increasing market share for smaller firms. A look at the three most significant types of Dodd-Frank-regulated financial intermediaries: banks, broker-dealers and futures commission merchants (“FCMs”) makes this clear:
- In the case of FCMs, CFTC Commissioner J. Christopher Giancarlo provides the statistics: “[T]he number of FCMs has dramatically fallen in the past 40 years: from over 400 in the late 1970s, to 154 before the 2008 financial crisis, and down to just 55 active firms serving customers today. As the number of FCMs has dwindled, systemic risk has increased, with the five largest firms accounting for more than 70 percent of the market.” See “CFTC Commissioner Giancarlo Warns of Threat Posed by ‘Increasing Ill-Conceived Regulatory Burdens’.”
- In the case of broker-dealers, FSOC reports that the number of firms has declined steadily from approximately 4900 in 2009 to under 4200 in 2015 (see Chart 4.12.1 of FSOC’s 2016 Annual Report).
- In the case of banks, concentration in the industry has increased materially. The FDIC‘s statistics indicate that since 2009, the number of commercial banks has declined from 6,829 to 5,289, and that a similar decline has occurred in the number of savings institutions.
In short, Dodd-Frank decreased the actual number of financial institutions and increased concentration in the financial industry. From an economic standpoint, this outcome is not surprising; a material increase in fixed costs, whether regulatory or otherwise, drives smaller firms either out of business or toward acquisition.
The legislators’ argument, that forcing GECC to shrink by means of heavy regulation is a good thing, is troublesome for other reasons as well. It simply does not provide a complete view of the costs inherent in heavy regulation. The conclusion fails to consider, for example, the loss of former GECC jobs, with all the attendant consequences that brings, such as a real reduction in social services. Making the argument that the shrinking of GECC is a good thing requires – at a minimum – an acknowledgement of these trade-offs.
A troubling political narrative has overtaken an objective assessment of recent financial regulation. Many have become so invested in defending Dodd-Frank that they cannot even acknowledge, let alone bring themselves to say, that parts (perhaps even large parts) are not working as intended. No one is boasting about the increased concentration in the financial sector since the adoption of Dodd-Frank.