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34 LAWMAKERS DEBATE "TOO BIG TO FAIL" AND CRITERIA FOR "SYSTEMICALLY IMPORTANT" TAG e debate over whether too big to fail" has ended and the criteria for designating a bank holding company as "systemically important" under Dodd-Frank continued in July as lawmak- ers convened to discuss the controversial law and its effect on the American financial system. One notable of the July House Financial Services Financial Institutions and Consumer Credit Subcommittee hearing was that many commentators, including members of Congress and banking regulators, have criticized the way bank holding companies are arbitrarily designated as "systemically important financial institutions" (SIFIs) under Dodd Frank. Under the law, the Federal Reserve is required to apply enhanced prudential standards to bank holding companies with $50 billion or more in total con- solidated assets—thus creating a "de facto" SIFI designation for these institutions. "Neither the statutory text nor its legislative history offers a clear explanation for why Congress chose a bright-line $50 billion asset threshold for application of enhanced standards," said Debevoise & Plimpton Partner Satish Kini, one of the wit- nesses at the hearing. "To the best of my knowl- edge, no economic studies or other data were cited by Congress in establishing this threshold." Bank holding companies (companies that own or control one or more U.S. banks or have a controlling interest in one or more U.S. banks) that are designated as SIFIs under Dodd-Frank are "too big to fail" and would receive a taxpayer- funded bailout if their economic stability were threatened. Some members of the subcommit- tee contended at the hearing that Dodd-Frank is codifying "too big to fail" by continuing to designate firms (both banks and non-banks) as SIFIs, therefore guaranteeing those firms a federal backstop should a financial crisis occur. "As policy makers, we must always strive to be precise when improving legislative frameworks as to minimize unintended consequences," said Rep. Randy Neugebauer (R-Texas), Chairman of the Financial Institutions and Consumer Credit Subcommittee. "I hope this hearing allows members to begin to consider different ways of measuring systemic importance and the regula- tory consequences of being designated a SIFI." One of those unintended consequences is the cost of maintaining "additional liquidity buffers" for banks to insure themselves against economic downturns, according to Zions Bancorporation Chairman and CEO Harris Simmons, one of the witnesses at the hearing. "While it is important for every depository institution to maintain appropriate levels of reserves to deal with normal fluctuations in cash flows, maintaining additional liquidity buffers as an insurance policy against times of extreme stress will almost certainly be a costly exercise for banks and for the economy at large," Simmons said. "Every dollar invested in high quality liquid assets is a dollar that cannot be loaned out and put to more productive use. e impact will likely be most particularly acute for smaller and middle-market businesses that do not have ready access to the capital markets, and for whom bank credit is their financial lifeblood." e same day as the subcommittee hearing on the designation of banks as SIFIs, U.S. Depart- ment of Treasury Secretary Jacob Lew said in an address at the Brookings Institution that SIFIs are held to higher standards for taxpayer protec- tion—that that the law ended "too big to fail." "To keep taxpayers from ever having to step in to save a financial firm again, Wall Street Reform ended 'too big to fail' as a matter of law," Lew told the audience. "In addition, regulators now have modern, commonsense tools to protect taxpayers. For example, the FSOC can designate large institutions as "systematically important" and hold them to higher standards. Also, in the event of a crisis or a bankruptcy, regulators can seize large financial institutions and wind them down in an orderly way." American Enterprise Institute Resident Scholar Paul Kupiec, one of the witnesses at the hearing, said the basic premise behind the "too big to fail" theory was flawed. "Many argue that the TBTF [too big to fail] problem arises because SIFI financial institu- tions are so large and important that they are incapable of being reorganized in a judicial bankruptcy process without causing widespread financial market distress and disrupting eco- nomic growth," Kupiec said. "e financial crisis that reached a crescendo after the September 2008 Lehman Brothers bankruptcy is often cited as evidence that supports the TBTF hypothesis, but such 'proof ' ignores the possibility that the Lehman Brothers bankruptcy was caused by an advanced financial crisis already in progress–and the failure was not the cause of the financial crisis that peaked in the fall of 2008." ECONOMIC AND JOB GROWTH PUSHING HOUSING SLOWLY TOWARD "NORMAL" LEVELS e housing market is slowly but surely inching closer to normal levels with the help of economic and job growth. According to the National Association of Home Builders (NAHB)/First American Lead- ing Markets Index (LMI) released in early Au- gust, markets in 75 of the approximately 360 metro areas nationwide have returned to or exceeded their last normal levels of economic and housing activity in the second quarter of 2015. is is an increase of 13 markets year-over-year. "e markets are gradually improving and economic and job growth continue to strengthen, which bodes well for housing for the remainder of the year," said Tom Woods, NAHB chairman and a home builder and developer from Blue Springs, Missouri. e NAHB reported the index's score increased to .92, which means the nationwide average is at 92 percent of normal economic and housing activity. Although this increase may seem marginal, this one-point rise places the market closer to a return to normal. In addition, 66 percent of markets have shown improvement year-over-year. "Of the three elements in the LMI (house prices, permits, and employment), house prices have had the broadest recovery, with 345 markets returning to or exceeding their last normal level," said David Crowe, NAHB's chief economist. "Meanwhile, 64 markets have met or exceeded their normal employment levels. e housing permit level has made the least progress toward normality, with only 26 markets at or above their last normal level." e index found Baton Rouge, Louisiana con- tinues to top the list of major metros on the LMI, with a score of 1.47, 47 percent better than its last normal market level. Other major metros leading the list include Austin, Texas; Honolulu, Hawaii; Houston, Texas; and Oklahoma City. Rounding out the top 10 are San Jose, California; Los Ange- les, California; Charleston, South Carolina; Salt Lake City, Utah; and Nashville, Tennessee.

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