U.S. Sens. Sherrod Brown (D-OH) and David Vitter (R-LA) have announced a new plan, the Terminating Bailouts for Taxpayer Fairness Act (TBTF Act), that would prevent any one financial institution from becoming so large and overleveraged that it could put our economy on the brink of collapse or trigger the need for a federal bailout. “Five years ago, risky practices at Wall Street banks puts our economy on the brink of collapse – and jeopardized the savings and pensions of millions of Americans. Today, the nation’s four largest banks are nearly $2 trillion larger than they were then – aided by an implicit government guarantee awarded by virtue of their ‘too big to fail’ status. If big banks want to continue risky practices, they should do so with their own assets. Our bill will ensure a level playing field for all financial institutions by ending the subsidy for Wall Street megabanks and requiring banks to have adequate capital to back up their liabilities.”
“The truth, according to the markets, is that ‘too big to fail’ is alive and well with the Wall Street megabanks,” Vitter said. “Our number one goal is to protect the taxpayers from financial risks and the best way to do this is by implementing a systemic solution, increasing the minimum amount of capital the mega banks are required to have.”
Despite receiving assistance from taxpayers in 2008, today, the nation’s four largest banks—JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo—are nearly $2 trillion larger today than they were before the crisis. Their growth has been aided by an implicit guarantee—funded by taxpayers and awarded by virtue of their size—as the market knows that these institutions have been deemed “too big to fail.” This allows the nation’s largest megabanks to borrow at a lower rate than regional banks, community banks, and credit unions. This funding advantage, which has been confirmed by three independent studies in the last year, is estimated to be as high as $83 billion per year. Together, Sens. Brown and Vitter have successfully pressed the Government Accountability Office (GAO) to conduct a study of the economic benefits that the “too-big-to-fail” megabanks receive as a result of actual or perceived taxpayer funded support.
During a press conference in the U.S. Senate, Brown and Vitter revealed the exact details of their legislation, the Terminating Bailouts for Taxpayer Fairness Act (TBTF Act) would ensure that financial institutions have adequate capital to protect against losses. Specifically, the TBTF Act would:
►Set reasonable capital standards that would vary depending on the size and complexity of the institution. Economic and financial experts agree that adequate capital is critical to financial stability, reducing the likelihood that an institution will fail and lowering the costs to the rest of the financial system and the economy if it does.
►Mid-sized and regional banks would be required to hold eight percent in capital to cover their assets
►Megabanks and institutions with more than $500 billion in assets, would be required to meet a new 15 percent capital requirement
►Community banks would remain unchanged by the legislation, as the market already requires them to maintain capital ratios approaching 10 percent of their assets
Limit the government safety net to traditional banking operations. When the government established the Federal Reserve in 1913 as a lender of last resort and created deposit insurance in response to the Depression, support was intended for commercial banks that provided savings products and loans to American consumers and businesses. At that time, most banks had enough shareholder equity equal to 15 to 20 percent of their assets. In the ensuing decades, the expanding federal safety net allowed financial institutions to depend less and less on their own capital. Federal support was stretched far beyond its original focus, particularly when financial institutions were permitted to enter into the business of insurance, securities dealing, and investment banking. Brown and Vitter’s bill would limit the government safety net to traditional banking operations, protecting commercial banks rather than risky, investment banking activities.
Provide regulatory relief for community banks. By reducing regulatory burdens upon community banks, they can better compete with mega institutions. Because community institutions do not have large compliance departments like Wall Street institutions, this legislation provides commonsense measures to lessen the load on our local banks.
►Expands the definition of “rural” lenders that can offer balloon mortgages
►Reduces some impediments for small banks and thrifts to raise capital or pay dividends.
►Creates an independent bank examiner ombudsman that institutions can appeal to if they feel that they have been treated unfairly by their examiner.
►Adopts privacy notice simplification legislation.
“ICBA applauds Sens. Brown and Vitter for advancing the debate to bring balance back to the financial services marketplace,” said Bill Loving, chairman of the Independent Community Bankers of America (ICBA) and president and CEO of Pendleton Community Bank in Franklin, W.Va. “By imposing equity capital guidelines that are appropriately scaled to the size, scope and risk of the too-big-to-fail institutions, this legislation will reduce systemic risk, protect taxpayers and put our nation’s community banks on a competitively balanced playing field.”