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Too-Big-to-Fail Bill DOA: Commentators

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Investors should expect “headlines, hearings and speeches” from proponents of the too-big-to-fail bill that was introduced Wednesday by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., according to analysts at Washington Analysis, but that will be “mere noise,” they say, as the bill is “highly unlikely to pass into law.”

Under the bill, U.S. regulators would replace Basel III requirements with a significantly higher capital buffer, including an additional surcharge for institutions with more than $500 billion in assets, like JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley.

Brown and Vitter wrote in a Wednesday op-ed for The New York Times that “Today, the nation’s four largest banks—JPMorgan Chase, Bank of America, Citigroup and Wells Fargo—are nearly $2 trillion larger than they were before the [financial] crisis, with a greater market share than ever. And the federal help continues—not as direct bailouts, but in the form of an implicit government guarantee. The market knows that the government won’t allow these institutions to fail.”

Continued Brown and Vitter: “We want to reverse this dangerous trend with bipartisan action aimed at ending ‘too big to fail’ in a practical, responsible fashion.” Their legislation, they said, would “ensure that all banks have proper capital reserves to back up their sometimes risky practices—so that taxpayers don’t have to.” It “would require the largest banks to have the most equity, as they should.”

The measure would “end the corporate welfare enjoyed by Wall Street banks, by setting reasonable capital standards that would vary depending on the size and complexity of the institution,” Brown and Vitter wrote. “Economic and financial experts on both the left and the right agree that capital is a vital element of financial stability. Adequate capital levels lower the likelihood that an institution will fail and lower the costs to the rest of the financial system and the economy if one does.”

Unfortunately, the two senators wrote, “existing capital rules are insufficient to prevent another crisis and are either too complex to administer or too easy to manipulate.”

Analysts at Washington Analysis say that “while breaking up the banks makes for good populist talking points, the effort does not have adequate support in Congress to be enacted.” The loudest proponents of such ideas, the analysts say, “are in the minority in Congress, with a significant portion of both parties having little appetite for yet another overhaul of the financial regulatory system.”

Even the new chairman of the House Financial Services Committee, Rep. Jeb Hensarling, R-Texas, is on record as supporting increased capital requirements for large financial institutions.

The Securities Industry and Financial Markets Association came out against the bill, stating Wednesday that the bill would “force financial institutions to raise capital excessively higher than current levels, which would limit an institution’s ability to lend to businesses, hampering economic growth and job creation.” SIFMA stated that “we continue to believe that no institution should be too big to fail and that taxpayers should never again be put at risk in a future financial crisis. Since 2008, Tier 1 capital has more than doubled—increasing about $400 billion, or from 5.6% to 11.3% at the end of 2012—reaching a historic high according to the FDIC.”

The legislation, SIFMA said, also “calls for the U.S. to pull out of the Basel Committee framework. Such a move would be an abdication of U.S. leadership, would undermine uniform global capital standards, and actually increase systemic risk by driving more business outside the U.S. and into the shadow banking sector.”

The Brown-Vitter bill “ignores” the framework set forth in the Dodd-Frank Act that “would effectively address too-big-to-fail through new, heightened prudential and capital standards.”

Said SIFMA: “We should focus on completing the remaining rulemakings mandated by Dodd-Frank instead of enacting new legislation that would undermine the U.S.’ standing in the global financial system.”


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