November 10, 2015

Warren and Cummings Investigation Finds That Repeal of Dodd-Frank Provision Now Allows Banks to Keep Nearly $10 Trillion in Risky Trades on Books

Democrats Urge SEC and CFTC to Impose Strong Rules to Protect Taxpayers and the Economy

They Ask GAO to Investigate Impact of Repeal After Regulators Failed to Analyze Risk

Washington, DC - Today, United States Senator Elizabeth Warren (D-Mass.) and Rep. Elijah E. Cummings (D-Md.), Ranking Member of the House Committee on Oversight and Government Reform, released new information about their investigation into the risks posed to taxpayers and the economy after last year's partial repeal of Section 716 of the Dodd-Frank Act.  Section 716 was originally designed to prevent taxpayer bailouts of federally-insured banks with risky swaps holdings, but was repealed during passage of the 2014 "Cromnibus."

Their investigation reveals that this repeal now allows banks to keep nearly $10 trillion in swaps trades on their books that - were it not for the Dodd-Frank rollback - would be "pushed out" to entities that are not insured with taxpayer funds.  It also finds that regulators have not conducted an analysis of the financial and taxpayer risks posed by the repeal, despite the fact that it allows banks to trade trillions of dollars of risky derivatives.

In response to these findings, Cummings and Warren sent a letter today urging the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to enact strong rules to protect taxpayers and the financial system.  Their letter warns that swaps margin rules recently issued by the bank prudential regulators failed to adequately address the risks posed by the repeal, leaving the CFTC and SEC as the last line of defense.

"While the Dodd-Frank rollback and the weak margin requirements imposed by prudential regulators have created new risks for taxpayers and the financial system, your agencies are in position to mitigate these risks," Warren and Cummings wrote.  "Congress required the SEC and CFTC to each issue rules governing uncleared swaps. ... As your agencies finalize these rules, we urge you to act to protect the financial system and protect taxpayer interests."

Cummings and Warren also wrote a letter today asking the Government Accountability Office to conduct an investigation into the impact of the repeal of this Dodd-Frank provision.

"The failure to assess the impact on banks and the economy of the repeal of Section 716 raises critical questions about whether federal policymakers are sufficiently attentive to the risk posed by nearly $10 trillion of risky swaps now primarily held-and allowed to be traded and held on an ongoing basis-by a handful of the country's largest, FDIC-insured banks," Warren and Cummings wrote.  "Understanding this risk is critical as policymakers continue to make decisions about how banks are regulated."

In January, Cummings and Warren wrote to four banks asking for information about the risks created by the repeal of Section 716, but received only limited information in response.

Warren and Cummings wrote in July to the Federal Deposit Insurance Corporation (FDIC), Federal Reserve (Fed), Office of the Comptroller of the Currency (OCC), and the CFTC asking for clear and quantifiable information on how this repeal would affect banks' swaps activity and risk to taxpayers.  The Members are making all of these responses available to the public today.

Read the letters sent today here:

Letter to SEC and CFTC
Letter to GAO

Read the regulators' responses to the July 2015 letters from Warren and Cummings here:

Response from Fed
Response from OCC
Response from CFTC
Response from FDIC

Read the letters from the banks here:

Response from Bank of America
Response from JPMorgan Chase
Response from Citibank
Response from Goldman Sachs




Photo credit: Rev Stan, licensed under Creative Commons.