‘Too-big-to-fail’ grouping would set up cushion
WASHINGTON — Sen. David Vitter, R-La., is pushing to undo some of the government’s so-called “too-big-to-fail” provisions for the largest banks.
Vitter instead wants to require the banks to set aside more resources as financial cushions during economic disasters or major financial losses.
Vitter co-sponsored a new bill introduced as the “Terminating the Expansion of Too-Big-To-Fail Act” and then he co-authored a bipartisan letter with Sen. Sherrod Brown, D-Ohio, pressing Federal Reserve Chairman Ben Bernanke to increase the capital requirements of “megabanks” well above the requirements of other banks.
“Placing higher capital requirements on megabanks is a common sense way to fix the dangers of too-big-to-fail, and Chairman Bernanke has even said this would make our financial system safer with limited impact on the economy,” Vitter said in his Tuesday announcement of the letter.
“The megabanks should bear their own risks so that taxpayers won’t get hung out to dry with another Wall Street bailout.”
The biggest banks are larger and more powerful than ever. “The assets of the six biggest U.S. banks currently equal 62 percent of (the) U.S. Gross Domestic Product, up from 18 percent in 1995,” Vitter and Brown wrote.
The two senators, who sit on the Senate Banking Committee, are asking Bernanke to focus on increasing capital standards for the largest banks.
On Tuesday, Vitter said focusing on capital requirements is a “tangible” fix rather that an “avalanche of new regulations.”
“We urge you to revisit your proposed rule and modify it so that megabanks fund themselves with proportionately more loss-absorbing capital per dollar of assets than smaller regional or community banks,” Vitter and Brown wrote.
“The surcharge on the megabanks should be high enough that it will either incent them to become smaller or will help to ensure they can weather the next crisis without another taxpayer bailout.”
The letter notes that many New York banks survived the Great Depression because they funded up to 20 percent of their assets with capital.
Most of the largest banks have a 7 percent capital requirement and pending proposals to the Federal Reserve would increase the requirement by adding from 1 percent to 2.5 percent more.
While Vitter does not have a set number in mind, he said, the capital requirement should be “significantly higher” than 9 percent or so.
Some of the officials of the top banks have already argued that the proposed capital requirements are too high and could slow their abilities to make loans.
Part of the reason for forcing greater capital requirements on the largest banks is because they are international and more susceptible to fluctuations in the global economy, Vitter and Brown wrote, as opposed to regional banks that are primarily domestic.
Vitter’s new bill takes aim specifically at aspects of the Dodd-Frank law that was enacted after the Wall Street bailout to implement more regulations and prevent another economic crisis.
Vitter wants to undo part of the law involving the creation of the Financial Stability Oversight Council, which is a group of financial regulators, chaired by the secretary of the U.S. Treasury.
Vitter’s concern is the FSOC created special designations for the biggest banks subject to greater federal regulations and that the vagueness in the language could then be used to extend the same “too-big-to-fail” provisions to other industries beyond the banking world.
The existing law labels some top banking and even non-banking entities as “systemically important,” which Vitter argued is essentially the same as “too big to fail.”
Rep. Scott Garrett, R-N.J., introduced the same bill in the House, where the bill could progress more quickly under GOP control unless Republicans also take control of the Senate after the November elections.
“Our bill takes the federal government out of the business of picking winners and losers in the economy because they’re too-big-to-fail,” Vitter stated.
“While I’ll continue fighting to eliminate this mentality with the megabanks, we need to stop the spread of the too-big-to-fail virus into other sectors of the economy.”
Given hindsight, a lot of politicians and pundits have pointed to the 1999 repeal of much of the Glass-Steagall Act, which had kept commercial banks from merging with investment firms until it was repealed, as a key precursor to the Wall Street crash.
The Wall Street and banking industry push had decried the law as an archaic Great Depression-era law that was holding back the free market. The bipartisan repeal was signed into law by President Bill Clinton just a few months after Vitter was voted into Congress.
Vitter said he is looking into multiple legislative options that could add more taxpayer protections in such areas that existed prior to the repeal.
“I’m very open to anything in that category,” Vitter said.