Bi-Partisan Support for Bill to Mandate a Higher Capital Requirement for Too Big to Fail Banks

Sherrod Brown headshot_color2vitter-headshot-200

Respectfully submitted by Lawrence E. Rafferty (rafflaw)- Guest Blogger

Last week I wrote about a disturbing joint FDIC and Bank of England plan that could allow big banks to grab depositors funds in order to balance their books.  FDIC-BOE  As a follow-up to that discussion, I saw an article discussing a proposed Senate bill that would require our biggest banks to support a higher capital requirement than their smaller counterparts.  The bill in question is co-sponsored by Democratic Senator Sherrod Brown and Republican Senator David Vitter.  I thought it was especially interesting when one of this proposed legislation’s critics seemed to indicate that this legislation is unnecessary because it disregards the role the FDIC plays in protecting depositors accounts.

‘ “I view it as a radical view of how American banks should be restructured that seems to disregard the role of the FDIC coverage, prudential regulation and the totally different structure of the 2013 economy,” Petrou said in an interview.” ‘  Bloomberg   I guess Ms. Petrou didn’t read my article or the various articles before and after mine that discussed the plan that the FDIC made with the Bank of England to completely avoid the FDIC coverage and allow bankers to take depositors funds and replace those funds with stock shares in order to keep the bank afloat.  Or then maybe she did?

“The largest U.S. banks, including JPMorgan Chase & Co. (JPM) and Bank of America Corp., would have to hold capital in excess of Basel III standards under a proposal being drafted by Senate Democrats and Republicans to curb the size of too-big-to-fail banks.

The current draft of the legislation would require U.S. regulators to replace Basel III requirements with a higher capital standard: 10 percent for all banks and an additional surcharge of 5 percent for institutions with more than $400 billion in assets. Senators Sherrod Brown, a Democrat from Ohio, and David Vitter, a Republican from Louisiana, have said they intend to introduce the bill this month.” Bloomberg   While this proposal would not solve the Too Big to Fail or Jail crisis, it could be a start in the right direction.  The fact that it has bi-partisan support gives this author some hope in the process.

It is also interesting to note that this proposed bill would require that these banks use actual, tangible assets in this capital requirement instead of relying on risking assets to meet their minimum capital requirement.  “The legislation would require banks to rely more on tangible common equity and less on risk-weighted assets. The bill would require the Federal Reserve and Comptroller of the Currency to write regulations setting capital standards for subsidiaries with at least $50 billion in consolidated assets.”  Bloomberg  I consider this part of the legislation to be just as important as the increased capital requirement provision.  As I read it, it would prevent these big banks from meeting their minimum capital requirement levels by utilizing risky assets that may be worth far less in reality.

Senators Brown and Vitter were very specific in their comments when they announced their proposed legislation which they planned to attach to the Senate Budget resolution.  ‘“It’s time we stop subsidizing risky Wall Street practices. We’ve seen how too big to fail is also too big to manage, too big to regulate, and too big to jail,” Brown said. “Yet the biggest Wall Street megabanks are actually rewarded with a government guarantee by virtue of their size. Ending too big to fail is about protecting taxpayers and our economy, and ensuring a truly competitive market for mid-sized banks, community banks, and credit unions.”

“Too-big-to-fail is alive and well, and at the expense of taxpayers,” Vitter said. “These special handouts create an uneven playing field – making it harder for our community banks and credit unions to compete with the mega-banks. Beyond the TARP bailouts, the government has created a belief in the marketplace that the government will provide support to the mega-banks.”  Vitter and Brown’s amendment will end federal subsidies and funding advantages for megabanks larger than $500 billion and prohibits a bank tax or assessment with language stating that the subsidy is eliminated, “without raising revenue.” ‘ Brown.Gov

This legislation passed on a 99-0 vote as an attached amendment to the Senate Budget Resolution on March 23, 2013.  Brown.Gov    Now, we have to wait and see if it survives the full legislative process and becomes law.  Does it surprise anyone that the banks would not be in favor of a plan that makes them actually take less risk with our assets?  I have included a link below to a presentation on the Senate floor by Senator Brown where he discusses the impact of banks that are Too Big to Fail.  Do you agree with the full United States Senate that these financial institutions need to be reined in and regulated more closely?

Sen. Sherrod video presentation; 


32 thoughts on “Bi-Partisan Support for Bill to Mandate a Higher Capital Requirement for Too Big to Fail Banks”

  1. Rafflaw,

    Here’s an interesting post by Matt Taibbi:

    Dan Loeb Simultaneously Solicits, Betrays Pension Funds
    By Matt Taibbi
    POSTED: April 11, 2013

    There’s confidence. There’s chutzpah. And then there’s Dan Loeb, hedge fund king extraordinaire and head of Third Point Capital, who’s getting set to claim the World Heavyweight Championship of Balls.

    On April 18, Loeb will speak before the Council of Institutional Investors, a nonprofit association of pension funds, endowments, employee benefit funds, and foundations with collective assets of over $3 trillion. The CII is an umbrella group that represents the institutions who manage the retirement and benefit funds of public and corporate employees all over America – from bricklayers to Teamsters to teachers to employees of Colgate, the Gap and Johnson and Johnson.

    Loeb is going to be, in essence, pitching his services to these institutional investors. He already manages the money for several public funds, including the Ohio Public Employees’ Retirement System, the New Jersey State Investment Council, the Sacramento County Employees’ Retirement System, and the City of Danbury Retirement System. To give you an idea of the scale, New Jersey alone has $100 million invested with one of Loeb’s funds.

    When he comes to speak at CII, Lobe will almost certainly be seeking new clients. There will be some serious whales in these waters: For instance, CalSTRS, the California State Teachers’ Retirement System, will definitely be represented (Anne Sheehan, the director of corporate governance for CalSTRS, will be moderating Loeb’s panel).

    But here’s the catch. Dan Loeb, who isn’t known as the biggest hedge-fund asshole still working on Wall Street (only because Stevie Cohen hasn’t been arrested yet), is on the board and co-founder of a group called Students First New York. And Students First has been one of the leading advocates pushing for states to abandon defined benefit plans – packages which guarantee certain retirement benefits for public workers like teachers – in favor of defined contribution plans, where the benefits are not guaranteed.

    In other words, Loeb has been soliciting the retirement money of public workers, then turning right around and lobbying for those same workers to lose their benefits. He’s essentially asking workers to pay for their own disenfranchisement (with Loeb getting his two-and-twenty cut, or whatever obscene percentage of their retirement monies he will charge as a fee). If that isn’t the very definition of balls, I don’t know what is.

    It’s one thing for a group like Students First to have an opinion about defined benefit plans in general, to say, as they have, that “today’s district pensions and other benefits are not sustainable and contribute to a looming fiscal crisis.” But it’s another thing for a Vice President of Students First like Rebecca Sibilia to tweet the following just a few weeks before one of its board members asks for money from a fund like CalSTRS:

    Outdated & underfunded #pension systems like CALSTERS break promises to #teachers#edreform #thinkED via @HuffPostEdu

    That’s a hell of a sales pitch for Loeb to be making: “I belong to an organization that thinks you’re all dinosaurs. Now give me a hundred million dollars.”

  2. Rafflaw,

    I thought that you might find this article interesting:

    Foreclosure Review Program’s Regulators Take Pounding From Elizabeth Warren, Sherrod Brown
    By Ben Hallman
    Posted: 04/11/2013

    Two prominent Democratic senators levied a withering attack on federal bank regulators on Thursday, accusing them at a Senate hearing of putting the interests of banks ahead of consumers in refusing to disclose what they know about the failed foreclosure review program that ended abruptly earlier this year.

    Most aggressive was Sen. Elizabeth Warren, a Massachusetts Democrat and longtime consumer advocate who is quickly developing a reputation as perhaps the Senate’s most effective cross-examiner. Following a series of probing questions that would not have been out of place in a court room, Warren excoriated the regulators for not immediately turning over case records of borrowers who may be considering private legal action against their bank.

    “You have made a decision to protect the banks but not to help the families who were illegally foreclosed on,” Warren said. “Families get pennies on the dollar for being the victims of illegal activities.”

    She continued: “You know of cases where the banks broke the laws, but you are not going to tell the homeowners. People want to know that their regulators are watching out for the American public, not the banks. Without transparency, [we] cannot have any confidence in your oversight or that markets are functioning correctly.”

    Over the past few months Warren and other legislators have repeatedly asked bank regulators at the Office of the Comptroller of the Currency and the Federal Reserve for more information about the case-by-case review of homeowner loans that was dropped in January in favor of a blanket $9.3 billion settlement.

    At the hearing before the Senate Banking Committee, Warren and Sen. Sherrod Brown (D-Ohio) made clear that they were not happy with the answers lawmakers have received thus far about the program, which is widely considered an expensive and lengthy debacle.

    Last week, the Government Accountability Office issued a scathing report of the reviews, finding that regulators did not provide proper oversight and that some errors likely went undetected. On Tuesday, regulators released new information suggesting that banks may have made errors in as many as 30 percent of all loans that qualified for a review, a figure far higher than previously reported.

  3. Swarthmore and Nal,
    It is unfortunate that the proposal doesn’t do everything needed, but at this point, I will take the two steps forward.

  4. Mike Konczal:

    Sherrod Brown and David Vitter have a new bipartisan bill to end Too Big to Fail. Here’s what it does.

    Basel III includes a “liquidity coverage ratio,” which requires banks to keep enough liquid funding to survive a crisis.

    Financial institutions have been lobbying against an aggressive implementation of Basel IIl’s liquidity requirements. They saw a small victory when some of the requirements were pulled back in the final rule in January. Brown-Vitter would remove them entirely — a remarkable win for the financial sector if the proposal passes.

  5. Joy,
    while I agree that the FDIC joint agreement with the Bank of England is a scary proposal, I do not consider our government bankrupt. If we keep playing to the tune of those that preach austerity, then we will be bankrupt and there will absolutely no middle class.

  6. FDIC treason with BOE is an acknowledgement that Americans hold 10.8 Trillion dollars in their bank accounts while FDIC holds $33 billion to cover those deposits should the banks fail again. This is seriously dirty underwear. Moreover, the deposits are seen as water in the desert to our bankrupt government. Equally serious is our government’s bailing out the big banks at all, which they continue to do monthly with $85 billion in hot off the press computer code. If you reward people for wrongdoing, they will only ratchet up wrongdoing. Cyprus broke the cardinal rule so expect the dike to “spill” here.

  7. Brad S.

    Banking without fractional reserves is not banking. If you want to propose going back on the gold standard and doing away with fiat money, that ‘s a separate issue (but that horse has been out of the barn for decades, so good luck on that). As I said above, requiring a 100% reserve ratio against deposits would effectively mean that banks could not lend money. You did not respond to that point.

    Like it or not, Keynesian economics is here to stay. F.A. Hayek certainly made a number of valid criticisms of Keynes, but Murray Rothbard was a crackpot conspiracy theorist. Rothbard’s book on the history of banking in the United States is filled with paranoid fantasy, not facts.

  8. Thank you, raf, as you continue to be one of our most sincerely gracious contributors.

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