The biggest financial institutions will pay roughly $440 million per year to fund the Federal Reserve Board’s new regulatory responsibilities under the 2010 Dodd-Frank financial reform law, the central bank announced Thursday. The Fed revealed its final rule for collecting that money from the firms commonly regarded as “too big to fail,” and known in technical jargon as “systemically important financial institutions,” or SIFIs.
The funds will cover the cost of enforcing various Dodd-Frank provisions regarding those largest, most interconnected financial firms, most notably the establishment and evaluation of “living wills” for the firms. The Wall Street reform law seeks to prevent future bailouts by forcing the SIFIs to write out plans for how their web of financial deals would be wound down in an orderly way should the business fail. In other words, rather than allow Wall Street to continue to believe certain huge companies would be propped up by taxpayer dollars should they collapse, the law requires such companies to write out contingency plans for a future without bailouts. Thursday’s rule would charge 70 of those companies according to their relative size, so that taxpayers are not paying for the up-front regulatory improvements either.
But despite having a finalized rule on funding the regulation, it’s still uncertain whether these SIFIs can even justify their own continued existence. Part of the idea behind the “living wills” is that they allow firms to make the case that their size doesn’t pose an inherent danger to the economy. The company maps out its connections to the rest of the financial system, convinces regulators that those connections are manageable in even the worst case scenario, and continues to do business. But if a SIFI fails to make that case well enough, the government is empowered to break them up into smaller, harmless companies. As of late June, regulators were not convinced by any of the “living wills” they had reviewed.
The deadline for final “living wills” is in October, so any regulatory effort to break up the megabanks is at least several months away. In the meantime, Democrats in the Senate have proposed a variety of laws to break up the banks, winning some state-level support. Various Federal Reserve officials have hinted at a willingness to go further towards breaking up these firms. Even Treasury Secretary Jack Lew, who has long insisted that Dodd-Frank’s reforms are sufficient to address the SIFIs, recently signaled he is open to tougher measures to break up banks should the SIFIs fail to show they don’t pose the same dangers they did in 2008.