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?