FDIC
Republicans want to get rid of the Orderly Liquidation Authority, which requires that banks create a living will that explains how they would “safely be unwound in the event of a collapse.” This reduces the requirement to bail them out because they would essentially be explaining in advance how they could handle their affairs themselves without assistance from the government. According to former Fed Chairman Ben Bernanke, this contains the damage to within the private sector and doesn’t let it spread to the taxpayers.
Additionally, the FDIC is allowed to take these banks into receivership to help them work through any complications that may occur when they are executing their living will during a crisis.
Republicans want to remove all of the above.
Volcker Rule
The Volcker Rule was created by Dodd-Frank to prevent investment banks from taking more than certain about speculation with their own funds. Investment banks had previously been allowed to gamble away all their money, even though they’re already required to provide liquidity to secondary financial markets by taking the other side of any position. In other words, if someone wants to buy, they have to sell, and vice-versa. They can’t do this if they run out of money.
More importantly, these banks provide credit to businesses and individuals. If they don’t have the money to do that or if they have less money than before, then they won’t issue as many loans, which means businesses can’t grow and the economy starts to decline rather rapidly like it did in the financial crisis. Banks aren’t allowed to use their own money to invest in securitized assets or derivatives. That means they can’t invest in something that depends on something else. In other words, you can’t invest in securitized assets that depend on someone paying their car loan or mortgage, and you can’t use your own funds to purchase derivatives simply for short-term gain because they could be wrong.
Limits on Credit/Debit Fees
This bill also wants to remove the limits on how much credit card companies can charge merchants for accepting debit card transactions on credit card machines. Since a debit card is basically cash, it’s best to have limits on how much the merchant can charge. Otherwise, merchants would have to charge more for products purchased with a debit card so that they can make their profit. Alternatively, some merchants would stop accepting debit cards, as some already don’t accept credit cards.
Statistically, most merchants were already charging the same price for goods and services paid with a debit card and very few were complaining about debit card fees. After the Durbin Amendment was passed to limit interchange fees on debit card transactions, banks fought back and started charging people that have checking accounts and charging really high prices for new checks.
“Too Big To Fail”
This bill also removes the Financial Stability Oversight Council’s authority call certain institutions “too big to fail.” However, this only includes “non-bank financial institutions and financial market utilities.”
Republicans are saying they want to allow banks to fail, claiming that would prevent reckless behavior because they know they can’t be bailed out, and opponents say that the banks would never be able to work through bankruptcy proceedings quickly enough to not dry up the credit markets, leading to another economic downturn.
So what are the effects of all of this?