As Geithner Testifies at Banking Hearing Today, Brown Calls on Treasury Sec. to Step Up Oversight, End “Too Big to Fail” Megabanks

Following Continued Reports of Wall Street Wrongdoing and Recent Calls for Reform, Brown Urges Treasury to Undo Consolidation in Financial System, Increase Accountability

WASHINGTON, D.C. – In advance of today’s Senate Banking Committee hearing, U.S. Sen. Sherrod Brown (D-OH) called on U.S. Department of the Treasury Sec. Timothy Geithner to step up oversight activities and hold Wall Street megabanks liable for risky bets.  In a letter to Sec. Geithner, Brown pointed to Barclay’s failure to properly oversee the LIBOR reporting process, as well as massive trading losses by U.S. banks as reasons why the Treasury Department should increase its oversight of trillion-dollar Wall Street institutions.

“With example after example of Wall Street fraud and abuse, it’s clear that the public has lost faith in the financial system,” Brown said.  “Wall Street’s behavior shows what more and more financial experts are beginning to acknowledge – these trillion-dollar megabanks are too big to manage and too big to regulate.”

“Do you agree with me, or do you believe that regulators are capable of overseeing trillion-dollar institutions with many different lines of business and thousands of diverse subsidiaries spread across many countries and continents?” Brown asked Geithner in the letter.

Yesterday, Sanford "Sandy" Weill, the former Chief Executive Officer of Citigroup, joined Brown’s call for the biggest banks to be broken up during an interview. Brown’s bill the Safe, Accountable, Fair & Efficient (SAFE) Banking Act of 2012, would hold Wall Street accountable, prevent future bailouts, and protect American homes, jobs, pensions, and businesses. 

“Unchecked Wall Street megabanks continue to dominate our financial landscape—threatening the stability of our nation’s families and small businesses,” Brown said. “That’s why sensible size limits on our nation’s large financial institutions will ensure that if banks gamble, they have the resources to cover their losses.”

Specifically, the SAFE Banking Act of 2012:

  • Imposes a strict 10 percent cap on any bank’s share of the total amount of deposits of all insured banks in the U.S. This would eliminate loopholes in the existing statutory cap.
  • Imposes a strict 10 percent cap on the liabilities that any one financial company can take on, relative to the U.S. financial sector. Like the deposit concentration limit, this closes loopholes in existing law.
  • Imposes a limit on the non-deposit liabilities (including off-balance-sheet (OBS) exposure) of a bank holding company of 2 percent of GDP. No bank holding company could exceed $1.3 trillion.
  • Imposes a limit on the non-deposit liabilities (including OBS exposure) of any non-bank financial institution of 3 percent of GDP. No non-bank financial company could grow larger than $436 billion. 
  • Codifies a 10 percent leverage limit (including OBS exposure) for large bank holding companies and selected nonbank financial institutions into law.

Full text of the letter is below.

July 26, 2012

The Honorable Timothy Geithner
Secretary
United States Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20229

Dear Secretary Geithner,

It is clear that the dangers presented by the existence of “too big to fail” megabanks require examination. Recent events, including Libor manipulation and significant trading losses at JPMorgan, provide further evidence that certain Wall Street megabanks are too big to manage and too big to regulate. It is no wonder that the chorus of those calling to downsize our nation’s megabanks has increased in recent months – from financial executives, current and former regulators, and a growing number of my Senate colleagues. As you know, the former Chief Executive Officer of Citigroup, who helped engineer the passage of the Gramm-Leach-Bliley Act, yesterday called for the biggest banks to be broken up. I urge you to reconsider your position on this issue as well.

The President argued in January 2010 that we must “prevent the further consolidation of our financial system,” because “[t]he American people will not be served by a financial system that comprises just a few massive firms.”[1] I could not agree more. Unfortunately, the Federal Reserve Bank of Dallas has observed that “huge institutions still dominate the industry—just as they did in 2008.”[2]

Mergers have led three of the four largest megabanks to grow by an average of more than $500 billion.[3] As the Financial Stability Oversight Council (FSOC), which you chair, notes in its annual report, “[a]s of the first quarter of 2012, the 10 largest banks held 52 percent of industry assets, worth approximately 47 percent of GDP, compared with 45 percent of industry assets, worth approximately 40 percent of GDP at the end of 2006.”[4] The combined assets of the six largest U.S. banks are now twice as large as the rest of the top 50 U.S. banks combined, and, according to the Federal Reserve Bank of New York, have a combined 14,420 subsidiaries.[5]

You have argued in the past that the U.S. financial system is less concentrated than those of most European countries, but the global financial crisis demonstrated that the models of the United Kingdom or Switzerland were not successful. Both of those nations have learned from their mistakes and are currently considering more significant reforms to their banking sectors – through either walling off, or “ringfencing,” institutions’ investment banking activities or by imposing 19 percent capital requirements. It is time for U.S. policymakers to embrace more robust reforms.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a modest step in the right direction. And while enhanced capital requirements for megabanks are necessary and appropriate, it is clear to me that more steps must be taken to protect the health and safety of the financial system. Until such steps are taken, if regulators continue to insist that they are up to the task of regulating trillion-dollar Wall Street megabanks, then they must be held accountable for either their actions or their inactivity in the face of Wall Street’s transgressions.

I am concerned that, in its settlement with Barclays, the U.K.’s Financial Services Authority (FSA) found that “Barclays had no (or inadequate) systems and controls that related specifically to its LIBOR … setting processes during the Relevant Period. There were several relevant opportunities for Barclays to review its systems and controls however Barclays did not carry out any review on these occasions.”[6] According to Barclays, this lack of systems and controls was a global problem that included trading practices at its bank affiliate in New York. Relevant bank and financial market regulators participating in the President’s Working Group on Financial Markets were briefed in 2008 about concerns regarding Barclays’ LIBOR process, yet none of these agencies detected the deficiencies discovered by the FSA. It also appears that no other U.S. LIBOR reporting banks were examined for similar deficiencies.

This shows once again that trillion-dollar global banks that engage in trading and capital markets activities require a level of scrutiny that regulators have been either unwilling or unable to apply. It suggests to me that these megabanks are too big to regulate. Do you agree with me, or do you believe that regulators are capable of overseeing trillion-dollar institutions with many different lines of business and thousands of diverse subsidiaries spread across many countries and continents? Please explain your answer.

Thank you for your attention to this important matter, and I look forward to your prompt response.

Sincerely,


Sherrod Brown
United States Senator

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