Rep. Brad Sherman (D-CA) and Sen. Bernie Sanders (I-VT) have reintroduced the “Too Big to Fail, Too Big to Exist Act,” in the House and Senate respectively. Under the legislation, any institution that is too big to fail will be broken up and reorganized to avoid more government bailouts and future risk to the economy. If passed, this legislation would require the Secretary of the Treasury to identify, then later break up, institutions that are deemed too big to fail to avoid the potential for a future government bailout and undue risk to our nation’s economy.
“Too big to fail should be too big to exist,” said Congressman Sherman who has advocated this position since 2008. “Never again should a financial institution be able to demand a federal bailout. They claim; ‘if we go down, the economy is going down with us,’ but by breaking up these institutions long before they face a crisis, we ensure a healthy financial system where medium sized institutions can compete in the free market.”
Sherman continued, “No longer should giant financial institutions be able to get low-cost funds by telling large depositories that even if the institution is mismanaged and faces financial default, by virtue of its sheer size it will be able to obtain a bailout from the federal government. Every financial institution should compete for funds based on the soundness of its balance sheet, and no financial institution should be able to claim that there is a special federal safety net available to its investors because of the institution’s sheer size.”
“In my view, no single financial institution should have holdings so extensive that its failure could send the world economy into crisis,” Senator Sanders said. “At the very least, no institution, no CEO in America should be above the law. If an institution is too big to fail, it is too big to exist.”
Richard Fisher, President of the Federal Reserve Bank of Dallas, argued that when markets presume a systemically important institution has implicit government backing, access to capital is easier. A recent study by International Monetary Fund researchers showed a potential advantage of these firms as high as 80 basis points (0.8 percent). Carrying out that estimation, Bloomberg News asserts taxpayers could be creating a subsidy of $83 billion dollars annually.
This legislation would require the Secretary of the Treasury to submit to Congress a list of all commercial banks, investment banks, hedge funds, and insurance companies that the Secretary believes have become too big to fail. Those entities deemed too large would then be broken up in a managed process of reorganization, so a single failure would no longer cause a catastrophic effect on the United States or global economy without a taxpayer bailout.
The Senate recently passed an amendment unanimously to its budget resolution to end subsidies or funding advantages for institutions over $500 billion in assets. Unfortunately, the Budget is still a resolution, not law.
“Too Big to Fail” refers to any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial government assistance.”