U.S. Sen. Elizabeth Warren (D-Massachusetts) and Rep. Elijah Cummings (D-Maryland) on Tuesday wrote two letters to government agencies based on the findings of their investigation as to the risk taxpayers and economy face after last year’s partial repeal of Section 716 of the Dodd-Frank Wall Street Conform and Consumer Protection Act.
The investigation conducted by the two lawmakers found that repealing Section 716 of Dodd-Frank allows banks to keep nearly $10 trillion in swaps trades on the books that would be “pushed out” to entities that are not insured with taxpayer funds, if not for the Dodd-Frank rollback. Section 716 was intended to prevent taxpayer bailouts of federally-insured banks with risky swap holdings.
The first letter was written by the two lawmakers to the Securities and Trading Commission (SEC) and Commodity Futures Trading Commission (CFTC), warning them that swaps margins rules recently issued by prudential regulators do not adequately address the risks that repealing Section 716 poses. In their letter, Warrant and Cummings, who is the Ranking Member on the House Committee on Oversight and Government Reform, urge the agencies to adopt strong rules that will protect both the financial system and taxpayers.
"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."
The Warren-Cummings investigation also revealed that despite the fact that repealing Section 716 of Dodd-Frank allows banks to trade trillions worth of risky derivatives, regulators have not conducted an analysis of the risks to taxpayers and to the financial system that the repeal poses. In response to this finding, the second letter written by Warren and Cummings urges the Government Accountability Office to investigate the impact of repealing Section 716 of Dodd-Frank.
"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."
Warren and Cummings wrote letters to four of the nation’s biggest financial institutions (Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs) in January 2015 requesting information about risks posed by the repeal of Section 716, but received only limited information in response, according to an announcement on Warren’s website. In Bank of America’s response, Director of Federal Government Relations John E. Collingwood pointed out some of the downside to Section 716, saying, “Section 716 as adopted in the Dodd-Frank Act would have raised the cost to end-users of managing their risk through the use of derivatives without any improvements in bank safety and soundness. From a safety and soundness perspective, Section 716 would have hindered banks’ ability to centrally manage their derivatives risk while at the same time ‘pushing out’ certain activities that are not subject to the strict prudential regulation of a bank.”
In July, Warren and Cummings wrote to four government agencies (the FDIC, the SEC, the OCC, and the CFTC) asking for more information on the risks posed to taxpayers by the repeal of Section 716 and how it would affect banks’ swaps activity.