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Public Statements

Too Big to Fail

Floor Speech

By:
Date:
Location: Washington, DC

BREAK IN TRANSCRIPT

Mr. VITTER. Mr. President, I am proud to join Senator Brown on the Senate floor to echo those comments. I agree that too big to fail, unfortunately, is alive and well, and that poses a real threat to all of us--to consumers and citizens everywhere and fundamentally to the American economy.

Coming out of the financial crisis, it seemed to me that the biggest threat and the biggest problem was continuing too big to fail. I think now, several years after the passage of Dodd-Frank, we have objective numbers and evidence that it did not bury too big to fail. Again, they are objective numbers and evidence and pricing in the market that too big to fail is alive and well.

I think the fact that Senator Brown and I are both here on the floor echoing each other's concerns, virtually repeating each other's arguments, is pretty significant. I don't know if we quite define the political spectrum of the Senate, but we come pretty darn close. Yet we absolutely agree about this threat.

I think Senator Brown's historical analogy is right. It is like the unfettered growth and power of the trusts in the late 19th century, and there too folks of all sorts of ideologies correctly recognized that threat--liberal Democrats as well as Senator Brown's Republican predecessor, Senator Sherman, and, of course, the biggest Republican trust-buster of all, Teddy Roosevelt. It is the same issue. It is the intense concentration of power. As a conservative, I am very suspicious and nervous about that, whether it is when it is in government or whether it is when it is in the private sector.

I think the sort of bipartisan consensus that, perhaps, we personify on the Senate floor is also growing outside Congress and outside this institution. Senator Brown alluded to some of it, but let me flesh that out.

We have, for instance, the Federal Reserve Board Governor, Dan Tarullo. He was appointed by President Obama. He was a prominent figure in drafting and implementing Dodd-Frank. He recently lamented:

..... to the extent that a growing systemic footprint increases perceptions of at least some residual too-big-to-fail quality in such a firm--

Meaning a megabank--

notwithstanding the panoply of measures in Dodd-Frank and our regulations, there may be funding advantages for the firm, which reinforces the impulse to grow.

In a little more blunt terms, our colleague, Senator Elizabeth Warren, who is also a figure in coming up with Dodd-Frank, said recently in our Banking Committee hearing with Chairman Bernanke:

I'd like to go to the question about too-big-to-fail; that we haven't gotten rid of it yet. And so now we have a double problem, and that is that the big banks--big at the time that they were bailed out the first time--have gotten bigger, and at the same time that investors believe that too-big-to-fail out there, that it's safer to put your money into the big banks and not the little banks, in effect creating an insurance policy for the big banks that the government is creating this insurance policy--not there for the small banks.

In a similar way, we have those concerns echoed in the real world outside this body on the right as well.

Recently, George Will said:

By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together. Government nurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism.

Peggy Noonan, another well-known conservative, has said:

If you are conservative you are skeptical of concentrated power. You know the bullying and bossism it can lead to. ..... Too big to fail is too big to continue. The megabanks have too much power in Washington and too much weight within the financial system.

So I do think there is a real and growing consensus in this body, in Washington, and in the real world, as I have suggested by those observers' quotes, and I think we need to build on that consensus and act in a responsible way.

Senator Brown and I have been doing that, first with joint letters to Chairman Bernanke and others, focusing on the need for significantly greater capital requirements for the biggest banks. We think this would be the best and first way we should try to rein in too big to fail, to put more protection between megabank failure and the taxpayer, more incentive for the megabanks to perhaps diversify, perhaps break up, or at least correctly price their size and risk to the financial system.

We are following up on that initial work that was reflected in letters and specific suggestions to Chairman Bernanke with legislation that is quite far along, and I know we will be talking about more both today and in the near future.

With that, let me invite Senator Brown to round out his comments, and then I will have a few more words to say.

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Mr. VITTER. Again, I thank Senator Brown for his partnership. Senator Brown, with those posters, made crystal clear the facts. The fact is that since the financial crisis, the megabanks have only continued to grow in size, in dominance, and in market share. In fact, that has accelerated significantly.

Some folks will say: Oh, well, that was a preexisting trend. That is because of a number of factors.

It is certainly true there are a number of factors at issue. But the growth has only accelerated since the crisis and Dodd-Frank. It has not let up. In addition, there have been several recent studies that actually quantify the fact that too big to fail is a market advantage, is, in essence, a taxpayer subsidy, as Elizabeth Warren suggested, for the megabanks.

An FDIC study released in September says that. It says:

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was explicitly intended to, in part, put an end to the TBTF [too big to fail] de facto policy.

But it concludes that:

The largest banks do, in fact, pay less for comparable deposits. Furthermore, we show that some of the difference in the cost of funding cannot be attributed to either differences in balance sheet risk or any non-risk related factors. The remaining unexplained risk premium gap is on the order of 45 bps [basis points]. Such a gap is consistent with an economically significant ``too-big-to-fail'' ..... subsidy paid to the largest banks.

Another recent study and working paper is an IMF working paper. It simply attempted to quantify that taxpayer too-big-to-fail subsidy. According to that study, before that financial crisis, the subsidy:

..... was already sizable, 60 basis points. ..... It increased to 80 basis points by the end [of] 2009.

Then, most recently, Bloomberg has tried to put pen to paper and refine that calculation, and Bloomberg's calculation is $83 billion--an $83 billion subsidy of the five biggest U.S. banks, specifically because of artificially cheap rates created by the market believing they are too big to fail.

I do not like huge size and dominance in market share, period. But certainly--certainly--we should not have government policy that is driving it, that is exacerbating it. It seems to me that should be a solid consensus left and right, Democrat and Republican.

Senator Brown and I are following up on our previous work and drafting legislation. Of course, we are not ready to introduce that today. But it would fundamentally require significantly more capital for the megabanks and would distinguish between megabanks and other size banks; namely, community banks, midsized banks, and regional banks. The largest banks would have that significantly higher capital requirement.

It would also try to walk regulators away from Basel III and institute new capital rules that do not rely on risk weights and are simple and easy to understand and are transparent and cannot be gamed the way we think Basel III can be manipulated and gamed.

Requiring this would do one or both of two things. It would better ensure the taxpayer against bailouts and/or it would push the megabanks to restructure because they would be bearing more cost of that risk to the financial system.

In addition, we are contemplating and discussing another section of this bill that would do something that I think is very important to do at the same time: create an easier--not a lax but a more appropriate regulatory framework for clearly smaller and less risky financial institutions such as community banks.

Again, I thank Senator Brown for his partnership. I thank him for his words today. I look forward to continuing to work on this project, as I believe a true bipartisan consensus continues to grow on this issue.

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