WASHINGTON, D.C. –U.S. Sen. Sherrod Brown (D-OH), Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, conducted a hearing today entitled, “Is Simpler Better? Limiting Support for Financial Institutions” today. The hearing examined our nation’s “Too Big to Fail” policies and efforts to protect American taxpayers by placing sensible size and leverage limits on our nation’s largest financial institutions.
“Wall Street megabanks should not be allowed to become so large that when they fail, they take small businesses on Main Street down with them,” Brown said. “That’s why I’m re-introducing legislation to eliminate the risks posed, and the unfair subsidies received, by trillion-dollar megabanks. Placing sensible size and leverage limits on Wall Street mega-banks smaller will benefit taxpayers by preventing future bailouts.”
Brown also introduced the Safe, Accountable, Fair, and Efficient (SAFE) Banking Act today, legislation that would hold Wall Street accountable, prevent future bailouts, and protect American homes, jobs, pensions, and businesses. Click here for a bill summary and report.
Brown’s testimony, as prepared for delivery, is below.
Two years ago today – after the worst financial crisis in over a half century – one-third of the United States Senate proclaimed that “Too Big to Fail” is simply too big.
A bipartisan group of thirty-three Senators supported a proposal that I, along with my former colleague Ted Kaufman, offered to eliminate the taxpayer support enjoyed by the largest Wall Street banks – banks that, by virtue of their size, could topple the entire economy should they fail. The principle was simple – Too Big to Fail is simply too big.
Though my proposal was not included in the Dodd-Frank Wall Street reform law, there is still an urgent need to confront the “Too Big to Fail” problem head-on. Ed Kane, a witness at our subcommittee hearing in August, has shown that bank size is correlated with systemic risk. And the IMF says that the larger an institution is, the more likely it is to receive a taxpayer-funded bailout.
From 1995 to 2011, the assets of the six largest U.S. banks grew from less than one-fifth of our nation’s GDP to about two-thirds of GDP. It comes as no surprise that these six banks borrowed nearly half a trillion dollars from the Federal Reserve and received $160 billion in TARP funds. And these “Too Big to Fail” institutions have only grown larger.
In 2006, before the financial crisis, the top 10 banks held 68 percent of total bank assets. By the end of 2010, they held 77 percent of total banking assets. The six largest U.S. megabanks are now twice as big as the rest of the top 50, combined.
We know that government support gives megabanks a boost in their credit ratings that helps them borrow more cheaply. A recent study confirms that governmental support gave “Too Big to Fail” megabanks an annual funding advantage of about $84 billion in 2008. This amounts to a government subsidy for Wall Street megabanks.
Government support also encourages megabanks to take more risks, by raising less equity than their community bank competition. Research by Thomas Hoenig, a member of the FDIC’s Board of Directors, shows that megabanks need to either raise $300 billion in capital or shrink their balance sheets by $5 trillion to meet the same standards as community banks.
The question that we will explore today is whether Wall Street megabanks should be allowed to become so large that when they fail they take our entire economy down with them. I believe that they should not, and that we should reduce government support for these trillion-dollar behemoths.
That is why, today, I am re-introducing legislation to eliminate the risks posed, and the unfair subsidies received, by trillion-dollar megabanks. Making Wall Street banks smaller and simpler will benefit taxpayers by preventing future bailouts.
It will improve pricing and service, as outsized market power reduces competition and inflates prices for clients and consumers. It will increase shareholder value, as Alan Greenspan, Sheila Bair, and analysts at Goldman Sachs all agree that megabanks would be more valuable if reorganized as simpler, more streamlined institutions. And it will ensure that success is based upon genuine competition, not taxpayer subsidies.
I am not alone in these beliefs. Experts who have spoken out about this issue include:
- Former Federal Reserve Chairman Paul Volcker;
- Sheila Bair, Former Chairman of the Federal Deposit Insurance Corporation;
- Richard Fisher, President and CEO of the Federal Reserve Bank of Dallas;
- Thomas Hoenig, member of the Board of the FDIC and former President of the Kansas City Federal Reserve;
- Cam Fine, President and CEO of the Independent Community Bankers of America;
- Jon Huntsman, Former Utah Governor and Republican presidential candidate; and
- Simon Johnson, Former Chief Economist at the IMF.
Support for this idea is growing – from people on all sides of the economic and ideological spectrum. The question that these people have asked themselves is not whether there is a perfect solution – there is no such thing. The question is whether there is a better way than providing support and subsidies to trillion-dollar megabanks.
The answer to that question is yes. Too Big to Fail is simply too big.