At a Senate Banking Committee hearing today, U.S. Sen. Sherrod Brown (D-OH) pressed U.S. Department of Treasury Sec. Jack Lew on efforts to end "too big to fail" policies. Brown, who chairs the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, specifically highlighted a report by the Financial Stability Oversight Council (FSOC) that identifies the threat Wall Street megabanks pose to our nation's economy.
"The oversight council chaired by the Treasury Secretary, himself, has acknowledged what many of us have been saying -- that "too big to fail' megabanks still threaten our economy." Brown said. "We all know the problem and now we need to fix it. It's time for Treasury to take immediate action that protects consumers -- and our economy- from another bailout."
One of the six potential threats to economic stability outlined in FSOC's 2013 Annual Report was risk-taking at large interconnected banks. Brown called on Lew, who also serves as chair of FSOC, to endorse the imposition of higher capital requirements on our nation's largest banks to avoid federal bailouts and ensure that taxpayers will not be forced to cover megabank losses.
Brown, along with U.S. Sen. David Vitter (R-LA) recently introduced legislation, The Terminating Bailouts for Taxpayer Fairness Act (TBTF Act), which would ensure that financial institutions have adequate capital to protect against losses. Brown and Vitter have also 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.
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 -- 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.