An interesting op-ed in today’s WSJ echoing my own previous op-eds (https://www.cato.org/publications/commentary/treasury-departments-regulatory-overreach-expands and https://www.cato.org/publications/commentary/too-big-fail-too-foolish-continue). The WSJ quotes former House Financial Services Chairman Barney Frank as saying that he does not favor designating large asset managers such as BlackRock or Fidelity as “systemically important” and that this was not the intent of his law. Those are pretty strong words from one of the chief architects of Dodd-Frank and all the more remarkable since Frank has seldom acknowledged an aspect of the financial sector he didn’t think could use more regulation.
According to the Journal, Frank noted that “overloading the circuits isn’t a good idea” and said that the Financial Stability Oversight Council (FSOC) created by Dodd-Frank “has enough to do regulating the institutions that are clearly meant to be covered—the large banks.”
Implicit in this this statement, is the idea that the FSOC is somewhat out of its depth when it comes to identifying “systemic risks” in the nonbank financial system. Unsurprising, since most of the Council’s staffers are young political appointees with no financial sector experience. Even more fundamental, as Frank alludes to, is the lack of evidence that the industries being targeted in any way contribute to widespread systemic risk. Frank concentrated on the lack of evidence that asset managers transmit risk through the system, but the same logic can be applied to insurers and hedge funds as well.
Absent a full repeal of the Dodd-Frank, and given the growing bipartisan recognition of the dangers of extending bank-like supervision to the nonbank sector, at the very least, Congress should limit the application of Titles I and II of Dodd-Frank to bank holding companies only.