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. Thanks Blouise, It was worth repeating!
    We can only hope that if we keep the bright lights on their misdeeds, that politicians will eventually come around.

  2. rafflaw,

    I wish I could be hopeful that something would be done about the “too big to fail” banks. Unfortunately, I doubt anything will be done to rein in the banksters.

  3. good thing I apologized as I see it was in the main body of raf’s piece

  4. raf and SwM,

    He’s a keeper (Brown). He’s also an excellent campaigner.

    He sends out regular newsletters and was using email and other techs long before his fellow politicians … I will let you know his response to my email about Debtors’ Prisons. His staff do a marvelous job with veterans helping them claim and get their benefits and have been doing so for years.

    A while back the republicans were threatening to gerrymander his district so he simply told them to back off or he’d run for Gov. They backed off and gave him a bigger district.

    He has three daughters. Here’s an email exchange from Connie Shultz, a journalist, in response to a scandal-seeking-conservative-blogger about a picture of her hugging Brown:

    “Email from conservative blogger, dated July 9, 2012:
    Dear Ms. Shultz,

    We are doing an expose on journalists in the elite media who socialize with elected officials they are assigned to cover. We have found numerous photos of you with Sen. Sherrod Brown. In one of them, you appear to be hugging him.

    Care to comment?


    Response, dated July 10, 2012:

    Dear Mr. [Name Deleted]:

    I am surprised you did not find a photo of me kissing U.S. Sen. Sherrod Brown so hard he passes out from lack of oxygen. He’s really cute.

    He’s also my husband.

    You know that, right?

    Connie Schultz.

    July 17: Waiting, I’m waiting….”

    Wasn’t that great … lol. Needless to say, he is very strong on women’s issues

  5. Porkchop, you neglected to mention the third thing that modern banks do today. Also from the article linked above:

    “Instead of this sound, noninflationary policy of 100% reserves, all of these banks are both allowed and encouraged by government policy to keep reserves that are only a fraction of their deposits, ranging from 10% for commercial banks to only a couple of percent for the other banking forms. This means that commercial banks inflate the money supply tenfold over their reserves a policy that results in our system of permanent inflation, periodic boom-bust cycles, and bank runs when the public begins to realize the inherent insolvency of the entire banking system.”

    You may of course continue to take the Keynesian economic path to destruction. I’ll stick to the Austrian.

  6. Brad S,

    A bank is an institution that does two things — take deposits and lend money. A bank deposit is essentially a loan to the bank — it’s a liability on the balance sheet. Greatly oversimplified, there are really only two types of assets on the other side of the balance sheet — (1) cash and cash equivalents and (2) loans (directly to borrowers or through some kind of interest in a loan such as bonds, commercial paper, treasury bills, etc.). If all deposits were required to be backed 100% by cash or demand deposits, then banks couldn’t lend money beyond the amount of their own capital and perhaps some form of subordinated debt (often called “capital notes”). That would effectively end the business of banking, because there would be no point in taking deposits if you couldn’t lend the money you are borrow from the depositors. There would be no interest rate arbitrage, and no money to be made.

    It would be particularly strange to require that time deposits be backed 100% by cash or demand deposits. Of course, under your suggested scheme, there would likely be not time deposits anyway, because the bank would not be able to pay interest to depositors.

    The Austrian School actually makes sense in some areas of economics, but when it comes to banking theory, not so much.

  7. …There therefore must be something about all banks–commercial, savings, S&L, and credit union–which make them inherently unsound. And that something is very simple although almost never mentioned: fractional-reserve banking. All these forms of banks issue deposits that are contractually redeemable at par upon the demand of the depositor. Only if all the deposits were backed 100% by cash at all times (or, what is the equivalent nowadays, by a demand deposit of the bank at the Fed which is redeemable in cash on demand) can the banks fulfill these contractual obligations.

  8. “Rafflaw: “I guess Ms. Petrou didn’t read my article or the various articles before and after mine…”

    I put the link into a comment there; more people need to read the information:

    “To worry that this new legislation would weaken the FDIC’s ability to protect depositors is late to the game and no excuse to exempt big banks from keeping more money in reserve. FDIC wants out of the insurance business and has taken steps (as has the EU and Canada) to use depositor money to “bail in” failing banks. This legislation is only one tiny step to insure that the next time mismanagement brings down a big bank- or all of them- taxpayers and depositors aren’t left holding the bag entirely. It’s long overdue and doesn’t even touch the major dangers built into our current banking system.”

  9. Matt Taibi:

    The Growing Sentiment on the Hill For Ending ‘Too Big To Fail’

    Republican Senator David Vitter and Democrat Sherrod Brown – the same Senators who have been planning legislation to cap the size of banks, a revived version of the failed Brown-Kaufman amendment from the Dodd-Frank bill – offered a non-binding amendment to the budget that would direct the government to end the subsidies and advantages banks derive from the perception that they are Too Big to Fail.

    The key word in this story is “non-binding,” but here’s the cool thing: the amendment passed unanimously.

  10. Swarthmore,
    Brown would be a good choice.
    It will be interesting to see what the response is from Brown’s office on the debtor prison issue. Ask him if this portion of the Budget Resolution will pass the House.

  11. Blouise, I hope the democrats chose a female presidential nominee and pick Brown for vp. The more I see of him the better I like him.

  12. Thanks, here, for the update, Lawrence and Jonathan. Whatever happened to being an industry leader? I guess that’s not in the vocabulary of the banking industry currently. If the banking industry believes that the FDIC is all that’s necessary to regulate their industry, that’s a striking amount of complacency on their part.

  13. Raf,

    Brown is my Senator and I have already written him about the matter Elaine discusses in her post (Debtors Prisons). I’ll be interested in his reply

  14. Seems promising it will pass the congress given that polar of a vote.

    I wonder if a requirement that large banks keep their accounts based upon state or regional areas would be worth considering. That way if a particular region has financial issues it won’t result as easily in a situation where the entire organization goes into the red.

  15. Anon,
    It helps that the Senate passed on this amendment 99-0, but that may just be cover for the Senators knowing the House will never go along with it.
    Thanks Dredd.

  16. Thanks much for the update rafflaw.

    Can’t say that I am against anything that tries to put a rope on these rogue institutions that are a danger to the common good.

    To that extent I will hope these “improvements” (going back to the way it used to be) pass the Senate and House and become law again.

  17. I will be very interested to see if this actually passes. I must admit I am mildly surprised sometimes by people.

    Brown is an interesting person. His anti-Big Banks efforts and anti-war stance are a plus however he has supported some heinous bills. PIPA and NDAA and gun control for example.

    Vitter is the same way as Brown. Like Brown almost all of his positives are also negated by the terrible things he supports.

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