Topic: Big Banks
“Congress should repeal Title I, Title II, and Title VIII of the Dodd–Frank Act. Title I of Dodd–Frank created the Financial Stability Oversight Council, a kind of super-regulator tasked with identifying so-called systemically important financial institutions and singling them out for especially stringent regulation. The problem, of course, is that this process effectively identifies those firms regulators believe are “too big to fail.””
The authors are arguing for repealing Titles I, II, and VIII of Dodd-Frank. So, what do those titles do, and what are the practical consequences to an American consumer, of repealing them?
Title I created the Financial Stability Oversight Council, as described above. Repealing it increases the likelihood of big banks taking on more risks without facing regulatory oversight, potentially leading to increased instability in the financial system. This means a greater risk of taxpayer-funded bailouts, which affects consumers’ access to credit, loans, and savings, and causes job losses, reduced home values, and losses in retirement savings.
Title II provided the orderly liquidation framework. Without it, the government might revert to bailouts using taxpayer money to rescue failing institutions, instead of letting them fail in a controlled way. Conversely, if the banks are allowed uncontrolled failures, this could see consumers finding their bank accounts frozen or losing access to funds if their bank collapses. If this becomes common, customer trust in the financial system will erode, potentially leading people to withdraw their money from banks, which in turn could lead to financial panics.
Title VIII provided regulators the authority to supervise and regulate the systems that handle the processing of trillions of dollars in transactions daily, ensuring the smooth transfer of money and securities between banks. Repealing this would lead to reduced oversight, increasing the risk of disruptions in payment, clearing, and settlement processes. It could lead to delays or failures in transactions, affecting everything from stock trades to everyday debit card purchases.
The bottom line is, as always, that deregulation is good for corporations; bad for people.
Full contextual analysis of Section 4.2: Department of the Treasury here.
“Treasury plays a role in funding the conservatorships of Fannie Mae and Freddie Mac. It should work to end the conservatorships and move toward privatization of these massive housing finance agencies. This would restore a sustainable housing finance market with a robust private mortgage market that does not rely on explicit or implicit taxpayer guarantees.”
This would not, by any means, “restore a sustainable housing finance market.”
Fannie Mae and Freddie Mac buy mortgages from lenders, pool them, then sell them as mortgage-backed securities (MBSs) to investors. This process injects liquidity into the mortgage market, enabling banks to offer loans at lower rates.
Without government backing, the risk associated with Fannie Mae and Freddie Mac’s securities would increase. Investors would demand higher returns to compensate for that risk, leading to higher interest rates for homebuyers. This will make homeownership even less affordable for average Americans.
Fannie Mae and Freddie Mac also ensure the availability of the 30-year fixed-rate mortgage – a staple of the American housing market – by purchasing these loans from lenders. Their guarantee of these mortgages gives lenders confidence to offer them widely. Privatizing these might reduce access to or eliminate the availability of 30-year mortgages, which are seen as risker for investors due to their long term. This means that homebuyers might have to rely on shorter-term or adjustable-rate mortgages.
As GSEs, Fannie Mae and Freddie Mac have mandates to promote affordable housing and serve a broader segment of the population. They help maintain access to mortgage credit for low- and middle-income borrowers. Privatization would shift the focus of these institutions to maximize profits rather than public policy goals. This means less access to affordable housing for low- to middle-income buyers.
In short, privatizing Fannie Mae and Freddie Mac would likely lead to higher mortgage rates, reduced availability of the 30-year fixed-rate mortgage, less access to credit for low- and middle-income borrowers, and potentially greater market volatility. While it could reduce government risk exposure – which is no doubt what the authors want – it would shift the focus from the greater good to maximum profitability, which will reduce access to housing for millions of Americans.
Full contextual analysis of Section 4.2: Department of the Treasury here.
“Congress should repeal the Corporate Transparency Act, and FinCEN should withdraw its poorly written and overbroad beneficial ownership reporting rule.”
This one is transparently (if you’ll excuse the pun) evil. The Corporate Transparency Act (CTA), passed in 2021, requires U.S. companies to disclose their beneficial ownership information – that is, the individuals who own or control them – to the Financial Crimes Enforcement Network (FinCEN). The goal of the law is to combat money laundering, tax evasion, and illicit financial activities by increasing transparency regarding company ownership structures. The CTA mainly targets shell companies used to hide illicit financial dealings.
The CTA is also seen as an essential tool for disrupting networks involved in human trafficking, narcotics, and terrorism financing.
So if we reduce oversight of this, what’s going to happen? Increased financial and other crimes, and decreased law enforcement visibility into it and capability of prosecuting it – with no visibility, it’s a LOT harder to prove the law was broken.
Full contextual analysis of Section 4.2: Department of the Treasury here.
“Further, U.S. exports were utterly unaffected by the reductions in the Bank’s activities. U.S. unemployment fell to a level not seen in half a century, but exports soared with financing provided by commercial lenders.”
“Utterly unaffected” is completely false. See detailed analysis. As for unemployment falling “to a level not seen in half a century”, and “exports soaring”:
Ex-Im came back in late 2019, when unemployment was pretty low (3.6%.) lowest in a half-century, though? That’s more or less accurate, although it’s noteworthy that unemployment was lower in in April 2023 (3.4%), so maybe unemployment level is driven by a lot more factors than whether the Ex-Im bank is in business. (Spoiler: Yes. That’s not a ‘maybe.’) As for the claim that exports soared? No. The abstract of a research paper, written entirely as a study of the effects of the Ex-Im shutdown, reads in part:
“We study the role of export credit agencies — the predominant tool of industrial policy — on firm behavior by using the effective shutdown of the Export–Import Bank of the United States (EXIM) from 2015–2019 as a natural experiment. We show that firms that previously relied on EXIM support experienced a 18% drop in global sales during the shutdown, driven by a reduction in exports. Firms affected by the shutdown were unable to make up for the loss of trade financing, especially if they were financially constrained, and consequently laid off employees and curtailed investment.” [Source]
Full contextual analysis of Section 4.3: Export-Import Bank here.
“Critics of EXIM employ a host of defamatory slurs like “crony capitalism” and “Bank of Boeing.” The “Bank of Boeing” moniker is particularly misleading, as it was born in the wake of the 2008 financial crisis when the airline industry was particularly hard hit and private-sector financing was not available for many airlines looking to purchase Boeing aircraft. EXIM’s portfolio tends to be cyclical with different industries relying on export credit financing at different points in time, depending on economic conditions.”
This requires a little context to fully understand.
During economic downturns, such as the 2008 financial crisis, private-sector financing became scarce. In these periods, Ex-Im played a crucial role in supporting Boeing and other industries when commercial banks were unwilling or unable to provide financing for large transactions, such as purchasing aircraft. This situation contributed to Boeing’s large share of Ex-Im support at the time, which critics have latched onto (this was largely Ex-Im helping to secure the sales of Boeing aircraft to foreign airlines.) Ex-Im only steps in when private lenders cannot or will not provide funding (which is why it’s considered risky.)
Full contextual analysis of Section 4.3: Export-Import Bank here.
“All transactions must have “reasonable assurance of repayment,” which is why EXIM has an exceptionally low default rate, historically hovering around 0.5 percent—a default rate that is the envy of private banking.”
This is overstating how effective Ex-Im is by double. Ex-Im’s default rate as of March 2024 was 1.012%. [Source]8 While this is lower than the default rate for private lenders, it’s not lower by significant amounts, at least in 2024. The delinquency rate on business loans for the same time period was 1.13% – just over a tenth of a percent. [Source] Ex-Im’s historical default rate is typically under 2%.
Full contextual analysis of Section 4.3: Export-Import Bank here.
“When EXIM enters a deal, the American taxpayer is always protected first. If a deal goes into default, the U.S. taxpayer is paid back before any other lender.”
This is oversimplified and inaccurate. Ex-Im generally structures its financing to protect U.S. taxpayers from losing money by requiring collateral, securing repayment guarantees, and in some cases, sharing the risks with private lenders. Ex-Im does have mechanisms in place that minimize the risk of defaults, including insurance policies and reserves to cover potential losses.
If a borrower defaults on a loan guaranteed or insured by Ex-Im, the bank steps in to make the lender whole by covering the outstanding balance, using taxpayer-backed funds. However, Ex-Im then attempts to recover the funds by seizing collateral, restructuring debt, or pursuing legal remedies. Taxpayers are effectively reimbursed through these recovery efforts.
The statement about taxpayers being paid back before any other lender is not entirely accurate. The U.S. taxpayer is not automatically first in line for repayment in every case. It depends on the specific terms of the financing and the collateral structure. In some deals, Ex-Im may be a senior lender (meaning they have a higher claim), while in others, they might share risk with private lenders, who would then also stand in front of taxpayers in the line of who gets paid back first.
Full contextual analysis of Section 4.3: Export-Import Bank here.
“Limit the Federal Reserve’s lender-of-last-resort function.”
A lender of last resort (LoR) is an institution, usually a country’s central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse. In the United States, the Federal Reserve acts as the lender of last resort to institutions that do not have any other means of borrowing, and whose failure to obtain credit would dramatically affect the economy. [Source]
The lender of last resort functions to protect individuals who have deposited funds—and to prevent customers from withdrawing out of panic from banks with temporarily limited liquidity.
Eliminating or limiting the lender of last resort function of the Fed increases the risk of bank failures and “bank runs”, where large numbers of customers withdraw their money simultaneously, potentially collapsing otherwise solvent situations. The Fed acts as a stabilizing force during crises by injecting liquidity into the system. If this function is eliminated, distress at one bank or in one part of the financial system could spread more easily, potentially triggering a broader financial panic. This could lead to systemic crises similar to the Great Depression or the 2008 financial crisis.
Full contextual analysis of Section 4.4: Federal Reserve here.
“Free Banking. In free banking, neither interest rates nor the supply of money is controlled by the government. The Federal Reserve is effectively abolished, and the Department of the Treasury largely limits itself to handling the government’s money.”
This is the first of a number of proposals Winfree suggests for limiting the power of the Federal Reserve’s role, in the absence of abolishing it entirely (in decreasing order of preference/effectiveness.)
Free banking refers to a system where private banks operate without central bank oversight or regulation, such as the Federal Reserve. In this system, banks issue their own currency (notes) backed by reserves like gold or other assets, and market forces regulate the banking system rather than a centralized authority.
For the pros and cons of free banking, see the analysis below.
Full contextual analysis of Section 4.4: Federal Reserve here.
“Commodity-Backed Money. For most of U.S. history, the dollar was defined in terms of both gold and silver. The problem was that when the legal price differed from the market price, the artificially undervalued currency would disappear from circulation. There were times, for instance, when this mechanism put the U.S. on a de facto silver standard. However, as a result, inflation was limited.”
This is the second of a number of proposals Winfree suggests for limiting the power of the Federal Reserve’s role, in the absence of abolishing it entirely (in decreasing order of preference/effectiveness.)
For the pros and cons of commodity-backed money, see the analysis below.
Full contextual analysis of Section 4.4: Federal Reserve here.