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Designating Systemically Important Financial Institutions: Balancing Costs and Benefits

Designating Systemically Important Financial Institutions: Balancing Costs and Benefits, Testimony before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, Douglas J. Elliott, Fellow in Economic Studies, the Brookings Institution

  • “In Dodd-Frank, Congress wisely gave regulators a wider mandate to oversee systemically important financial institutions (SIFIs). These institutions are the ones most capable of triggering financial crises through mistakes or bad luck, due to their importance as financial intermediaries and their interconnections with the rest of the financial system. As such, they merit more attention from regulators, more tools should be available for regulatory intervention, and they should be held to a somewhat higher standard of financial conservatism. The need for closer supervision is not erased by the steps that have been taken to reduce the potential for government bailouts of failing institutions. First, because it is impossible to totally eliminate the potential for a financial crisis to be severe enough to merit further taxpayer-financed rescues. Second, because even if this goal were achieved, so that creditors and shareholders picked up all the losses with no help from taxpayers, a serious financial crisis would still lead to a severe contraction of credit, sending the economy into a deep recession, such as we just experienced. You will recall that the recent recession cost taxpayers far more than did the bailouts. Banks are among the most likely institutions to be systemically significant, but other types of financial institutions can certainly be SIFIs and it is good that Dodd-Frank recognized this. Prior to this legislation, it was very difficult for the regulators to track the systemic risk of non-bank financial institutions, much less affect the level of that risk. Robert Litan and I wrote an extensive paper on non-bank SIFIs, to which I refer the members for a fuller explanation of my views. Today’s testimony will focus on a few key beliefs about how to identify and regulate non-bank SIFIs and some thoughts on the proposed regulations.”
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