CBO's Cost Estimate for the Restoring American Financial Stability Act of 2010

April 22, 2010

Yesterday CBO released a cost estimate for S. 3217, the Restoring American Financial Stability Act of 2010, as ordered reported by the Senate Committee on Banking, Housing, and Urban Affairs on March 22, 2010. S. 3217 would grant new federal regulatory powers and reassign existing regulatory authority among federal agencies with the aim of reducing the likelihood and severity of financial crises.

The legislation would establish a program to facilitate the resolution of large financial institutions that become insolvent or are in danger of becoming insolvent when their failure is determined to threaten the stability of the nation’s financial system (such institutions are known as systemically important firms). The program would be funded by fees assessed on certain large financial companies; an Orderly Liquidation Fund (OLF) of $50 billion would be accumulated, and in the event of a costly resolution, the fund would be replenished over time with future assessments. CBO estimates that receipts to the fund would exceed its expenditures during the 2011-2020 period, reducing deficits by a total of about $18 billion over that period. In later years, expenses of the OLF would exceed income from new assessments paid by financial firms, resulting in an increase in the deficit in those years.

A second new program would expand the authority of the Federal Deposit Insurance Corporation (FDIC) to provide government guarantees on a broad array of financial obligations of banks and bank holding companies if federal officials determine that market conditions are impeding the normal provision of financing to creditworthy borrowers (known as a liquidity crisis). Under the bill, participants in the program would be charged fees designed to recover the costs of the government guarantees. CBO estimates a net cost of less than $1 billion for that program over the next 10 years.

Other provisions of S. 3217 would change how financial institutions and securities markets are regulated, create a new Bureau of Consumer Financial Protection as an autonomous entity within the Federal Reserve, broaden the authority of the Commodity Futures Trading Commission and the Securities and Exchange Commission, establish a grant program to encourage the use of traditional banking services, expand the supervision of firms that settle payments between financial institutions, and make many other changes to current laws. For example, it would abolish the Office of Thrift Supervision and reduce the number of firms regulated by the Federal Reserve, shifting more responsibility to the Office of the Comptroller of the Currency and the FDIC. It would also establish a Financial Stability Oversight Council, led by the Secretary of the Treasury, which would be responsible for identifying risks to the nation’s financial stability and for facilitating information sharing and setting oversight priorities among regulators.

In total, CBO estimates that enacting S. 3217 would increase federal revenues by about $75 billion and direct spending by $54 billion over the 2011-2020 period. (Direct spending is spending that does not require any subsequent appropriation legislation.) As a result, those changes would decrease budget deficits by an estimated $21 billion over that 10-year period. In addition, CBO estimates that implementing the bill would increase spending subject to appropriation by $13 billion over the 2011-2020 period.

Under the legislation, as under current law, there is some probability that, at some point in the future, large financial firms will become insolvent and liquidity crises will arise, and that those financial problems will present significant risks to the nation’s broader economy. The cost of addressing those problems under current law is unknown and would depend on how the Administration and the Congress chose to proceed when faced with financial crises in the future; they could, for example, change laws, create new programs, appropriate additional funds, and assess new fees. Depending on the effectiveness of the new regulatory initiatives and new authorities to resolve and support a broad variety of financial institutions contained in S. 3217, enacting this legislation could change the timing, severity, and federal cost of averting and resolving future financial crises. However, CBO has not determined whether the estimated costs under the bill would be smaller or larger than the costs of alternative approaches to addressing future financial crises and the risks they pose to the economy as a whole.

The bill would impose intergovernmental and private-sector mandates, as defined in the Unfunded Mandates Reform Act (UMRA), on banks and other private and public entities that participate in financial markets. The bill also would impose mandates on states by prohibiting them from taxing and regulating certain insurance products issued by companies based in other states and by preempting certain state laws.

CBO has also prepared an estimate of the direct spending and revenue effects of a related House bill, the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173).