CBO: Effects of Dodd-Frank Overhaul Bill Depend on Whether Banks Fail

Estimates about the budget effects of a House Republican proposal to overhaul the 2010 Dodd-Frank financial law would vary depending on whether a systemically important bank fails after the bill’s enactment, according to an independent analysis for Congress.

The nonpartisan Congressional Budget Office’s report, published on Thursday, found that enactment of H.R. 10, known as the Financial CHOICE Act, would lower the federal deficit by $24.1 billion over 10 years. Implementation of the measure would cost about $1.8 billion during the same time period.

The bulk of budget savings, according to CBO’s score, would come from making changes to the funding and structure of the Consumer Financial Protection Bureau and eliminating a bank resolution mechanism administered by the Federal Deposit Insurance Corp. A total revenue loss of $5.9 billion would be offset by a $30.1 billion reduction in direct spending, CBO said.

The estimates “are subject to considerable uncertainty, in part because they depend on the probability in any year that a systemically important firm will fail,” CBO’s analysts wrote. “That probability is small under both current law and under legislation, but it is hard to predict.”

The fluctuations in estimates stem partly from the effects the legislation could have on the role the FDIC plays in winding down failing banks. Eliminating Dodd-Frank’s orderly liquidation authority mechanism and replacing it with bankruptcy, as the bill proposes, would reduce deficits by $14.5 billion over nine years, according to CBO.

But a bank failure under the new regime could lead to increased payouts from the FDIC’s Deposit Insurance Fund. The report cautioned that the potential effects on the DIF are “uncertain and difficult to quantify.”

“Repealing the FDIC’s orderly liquidation authority could change how large, systemically important firms that fail would be resolved in the future and who would bear the costs,” according to the analysis. “CBO expects that if a systemically important financial firm failed, some federally insured depository institutions would be among its creditors, increasing the probability of losses to the DIF.”

CBO projected that creditors’ losses could be greater under the bill’s regime compared to the current scenario, which in turn would put greater stress on the financial system.

A Democratic aide, however, said CBO’s analysis on the impact of repealing Dodd-Frank resolution doesn’t evaluate the extent of a bank failure’s impact.

Beyond the bank resolution discussion, CBO predicated that the eight banks holding more than half of total U.S. bank assets would not meet the capital threshold that’s central to the legislation’s proposal to exempt institutions from certain financial regulations if they maintain a 10 percent leverage ratio.

Even if those banks held sufficient capital, they still would need to follow international banking rules because of their label as globally systemic important banks, or G-SIBs.

“CBO expects that the G-SIBs would be unlikely to choose the alternative regulatory regime authorized by the bill,” the analysts wrote.

The bill’s sponsor, House Financial Services Committee Chairman Jeb Hensarling (R-Texas), underscored that part of the analysis in a statement provided to Morning Consult on Friday. CBO’s assertions about G-SIBs, he said, lend credibility to his argument that large banks prefer to operate within the Dodd-Frank paradigm.

“They know Dodd-Frank gives big banks a competitive advantage, and the big banks have gotten even bigger since Dodd-Frank became law,” Hensarling said.

Earlier this year, JPMorgan Chase & Co. Chief Executive Jamie Dimon said on Fox Business that changes to Dodd-Frank would be appropriate so long as they’re not “wholesale.”

Rep. Maxine Waters of California, the top Democrat on the Financial Services Committee, said in a statement Friday that Hensarling’s measure “would erase all of the progress we’ve made since the Great Recession, and put us on the road back to economic ruin.”

Morning Consult