The following post first appeared on American Banker’s BankThink blog. It is reprinted below with American Banker’s permission.
By Cornelius Hurley
Dec. 18, 2014
In his impactful book Don't Think of an Elephant, cognitive scientist George Lakoff illustrates how framing a discussion from the beginning is key to winning the argument. No one has learned this lesson better than the country's too big to fail banks. Since the beginning of the financial crisis, they have framed the debate over financial reform as being about everything but the subsidy that TBTFs receive because of their elite status.
Millions of lobbying dollars and thousands of pages of regulations are devoted to capital ratios, liquidity requirements, resolution regimes and an endless stream of regulatory complexity that numbs the mind. The net effect of this ceaseless patter is to divert our attention from the one key issue at the heart of the TBTF debate.
Now, in a moment of supreme hubris, the masters of debate framing have overplayed their hand. Big banks succeeded in repealing the swaps push-out rule enacted under the Dodd-Frank Act by holding the government funding resolution hostage. But in so doing, they inadvertently thrust the issue of taxpayer subsidies back into the spotlight — where it belonged from the beginning.
The swaps push-out provision of Dodd-Frank would have required the five big banks that account for 95% of swaps activity to move a portion of that business out of their taxpayer-supported banks and lodge it in their nonbank, uninsured affiliates. It is widely understood that removing the safety net of Federal Deposit Insurance Corp. coverage would have increased the cost of this activity and reduced its profitability for the five banks.
The big banks claimed that without FDIC insurance, they would be forced to pass the increased cost on to innocent end users like farmers, airlines and oil distributors. The implication of this risible threat was that the big banks were in the habit of sharing the entire financial benefit they received from this free insurance with their customers.
Even the most casual observer of our financial system can smell a subsidy as pungent as this. It was only a matter of time before progressive icon Sen. Elizabeth Warren pounced on this issue, warning of the prospect of a "#Citigroup Shutdown."
One would have thought that the big banks that benefit in so many ways from their size would be more subdued when dealing with their government subsidy, lest they reframe the TBTF debate.
Last summer, after all, a credulous General Accountability Office came forward with a report claiming that the subsidy flowing to the TBTF banks is negligible and may even be negative. The GAO made no mention of the subsidy the banks receive for conducting swaps activities in their insured banks. Perhaps the researchers ignored this significant part of the TBTF subsidy because they knew, by law, it was about to be pushed out of the depository institutions.
Naturally, the GAO report was received by a skeptical Senate Banking Committee, several of whose members questioned the validity of the findings. Their questions were, it turns out, warranted. After all, despite all the complex machinations built into Dodd-Frank, most observers are well aware that the TBTF banks are larger, more complex and more subsidized than they were before the crisis.
Now that the TBTFs have taken the latest of their many victory laps, what comes next? The legislation will force the FDIC and others to recalculate the subsidy big banks receive from taxpayers. This could well make the banks wish they'd never unleashed their lobbyists to gut this important part of Dodd-Frank.
Since FDIC deposit insurance now has exposure to a potentially massive amount of new risk, it must recalibrate. The agency should immediately undertake a risk assessment analysis to determine how its deposit insurance fund, currently valued at over $51 billion, will be impacted by the new exposure that has been thrust upon it by the big banks successful campaign.
To assist in this process, the FDIC should solicit bids from the private insurance industry for reinsuring against the risk that the Deposit Insurance Fund may have to make payouts in the event that previously-banned swaps are part of the estate of a failed TBTF bank.
Lastly, the Congressional Budget Office should study the financial impact that amending Section 716 of Dodd-Frank will have on the federal coffers. Had the TBTF lobbyists not chosen to take the federal government hostage in this process, such a study might have been conducted beforehand.
These responses will reframe the entire debate over TBTFs, shifting the argument away from capital requirements and the like and back toward the subsidy and how we make it go away.
If you happen to be one of the five banks that benefit from last week's disgraceful lobbying effort, you can file this under "be careful what you lobby for." If you're a taxpayer frustrated that six years after the financial crisis we still have TBTF banks corrupting our financial system and the body politic, you can file these proposed changes under, "Reframing the TBTF debate."
Professor Cornelius Hurley is the director of the Boston University Center for Finance, Law & Policy. Follow him on Twitter at @ckhurley.
