Throughout the marathon battles over Dodd-Frank, popular perceptions often concluded that the party lines were simple: Democrats are for consumers and Republicans side with those across the desk. All sorts of editorials are written on this premise, but it vastly over-simplifies the complexities of U.S. financial-services policy and the strong populist streak that knows no party affiliation. Democrats may like consumers a lot and Republicans worry more about undue regulatory burden, but they are united on one issue: none of them much likes big banks.
Any question about where the GOP in the House will side should be ended by a read of its draft agenda for the new Congress. To be sure, the agenda is just a draft, but we doubt its fiery language will dim much in the final version. Case in point:
The Committee will ask whether government actions to prop up large, complex financial institutions imply that other institutions are ? too small to save, and if recent interventions by the Treasury Department and Federal Reserve have prejudiced local and community banks and credit unions at the expense of institutions the regulators believe are ? too big to fail. As part of that review, the Committee will study the ways that financial institutions have expanded and the incentives that drove them to grow. Attention will be given to the conversion of investment banks to bank holding companies during the financial crisis and their long-term impact on the U.S. economy and regulatory structure. The Committee will closely evaluate the government agencies and offices which are now responsible for the supervision and potential resolution of ? systemically significant financial institutions. In examining the ? too big to fail issue, the AIG bailout will be carefully reviewed to determine whether the disparate treatment of large creditors and small creditors was consistent with the American expectation of equal treatment of all by government agencies.
And, that’s not all. Other parts of the agenda are at least as withering on those deemed TBTF. So, does this mean that the House will try to cut big banks down to size And, if so, how?
Most vulnerable, we think, is the systemic-resolution part of the Dodd-Frank Act, Title II. The agenda focuses on these provisions as potential harbingers of TBTF rescue unfair to community banks. This builds on comments throughout the Dodd-Frank debate from House and Senate Republicans who feared that the legislation’s systemic-resolution rules were akin to bail-out. They aren’t, in our view, but that doesn’t seem to matter much in the coming debate. We foresee a strong push to go back to bankruptcy for systemic resolutions. The Administration fears that bankruptcy will lead to lots more Lehmans, but advocates counter that Lehman failed with such catastrophic consequences because of the moral hazard stemming from the Bear Stearns rescue and GSE conservatorships that preceded it. One red-blooded bankruptcy, they argue, and markets will curb their own excesses without the need for systemic resolutions outside standard insolvency procedures.
Will Title II be repealed or whittled down? So far, we doubt it, but the debate will put even more pressure on the FSOC and FDIC to craft tough rules that penalize the biggest to the greatest degree possible. In fact, the FDIC is on track to take on large banks on Monday, when it finalizes the new deposit-insurance premium schedule that, at least as proposed, whacks the living daylights out of large banks. If the GOP agenda is to be believed – and we think it is – Republicans will be cheerleaders for these harsh rules, jostling Democrats out of the way.