Critics have begun to worry that Friday’s executive orders targeting too big to fail may signal another financial crisis is on the horizon.
On Friday, President Donald Trump signed two executive orders calling for a Treasury review of 2016 tax regulations, as well as the oversight of the nation’s “too big to fail” institutions. Specifically, the orders require a review of the Orderly Liquidation Authority and a 180-day review of the Financial Stability Oversight Council, which designates which financial institutions are deemed “systemically important” or, as most put it, “too big to fail.”
The review of the OLA, according to Treasury Secretary Steven Mnuchin, is designed to make sure it “doesn’t encourage excess risk-taking, moral hazard, and exposure to taxpayers.”
Financial Services Committee Chairman Jeb Hensarling praised the president’s action, noting that bailouts should not be an option.
“No company in America should ever be anointed ‘too big to fail’ and no taxpayer should ever be forced to pay for more Wall Street-type bailouts,” said Hensarling in a statement. “President Trump deserves tremendous praise for taking decisive action to protect taxpayers and our economy. He pledged to dismantle Dodd-Frank, and his actions today are another significant step towards ending the Dodd-Frank mistake that has given Washington bureaucrats more power to politically control our economy.”
However, according to Joseph Lynyak III, partner at Dorsey & Whitney, the OLA’s power is balanced by the FDIC’s authority—and that balance already prevents risk on its own.
“In regard to the orderly liquidation authority,” Lynyak said, “while it is an extraordinary power, it might best be viewed as a valuable tool in the FDIC's toolbox to resolve very large institutions, most particularly large bank holding companies. It should also be recalled that the FDIC has companion authority to borrow up to $500 billion from the Treasury, which must be paid back by other large banking institutions. This provides all large banks ‘skin in the game’ to ensure that competitors do not take excessive risks.”
As for the FSOC review, Mnuchin told White House reporters that it’s to ensure fairness and transparency in the council’s operations.
“I think the most important part of FSOC is that I can bring the regulators together, get everybody in a room, be able to address important part of regulation,” Mnuchin said. “FSOC also has the responsibility to designate certain entities, and the President will be instructing me to put a hold on that for designations until we do a thorough review and make sure it’s a fair and transparent process.”
But many are worried these reviews aren’t as innocent as they’re meant to sound. In fact, according to Sen. Sherrod Brown, D-Ohio, they could expose the economy to crisis-level risk.
“Any actions to undermine these protections encourage Wall Street’s risky behavior and leave taxpayers and our economy exposed to another catastrophe,” Brown told the New York Times [1]. “We should be working to lower taxes for hardworking families and workers across Ohio, not helping multimillion-dollar corporations cheat the system to avoid paying their fair share.”
Lisa Donnor, Executive Director of Americans for Financial Reform, said the orders threaten financial stability.
“From our perspective,” Donnor said, “it is a direction that is dramatically backwards on financial stability.”