Brown, Kaufman File Amendment On Too Big To Fail Legislation

Amendment Will Stop Mistakes of Economic Crisis from Being Repeated

WASHINGTON D.C. - U.S. Sens. Sherrod Brown (D-OH) and Ted Kaufman (D-DE) introduced an amendment to Wall Street Reform legislation that would change the size, leveraging, and capital requirement standards of "megabanks" in order to prevent financial institutions from becoming "too big to fail". The amendment (S.A. 3733), cosponsored by Sen. Bob Casey (D-PA), Sen. Sheldon Whitehouse (D-R.I.), Sen. Jeff Merkley (D-OR), Sen. Tom Harkin (D-IA), Sen. Bernie Sanders (D-VT) and Sen. Roland Burris (D-IL), will make common-sense changes to limit the size and exposure of financial institutions, and ensure that when banks take financial gambles they have the resources to cover their potential losses.

"If we're going to prevent big banks from putting our entire economy at risk, we need to place sensible size limits on our nation's behemoth banks. We need to ensure that if banks gamble, they have the resources to cover their losses," Brown said. "The SAFE Banking Act prevents megabanks from controlling too much of our nation's wealth - no one investment bank or financial institution should be able to risk more than three percent of our nation's gross domestic product and they should have enough money to back up their liabilities. This bill would not only prevent bailouts and protect against economic collapse, it will help boost lending to small businesses. We know that the dominance of a few megabanks has virtually frozen lending to small businesses, which account for 64 percent of new jobs. Having more banks will create competition and increase small business lending so that our economy can grow and unemployed Americans can find jobs."

"Only by capping the size and leverage of banks at manageable limits can we end ‘too big to fail' for good," said Sen. Kaufman. "In the 1930s Congress passed laws that gave our nation a foundation for financial stability for almost 50 years. Why gamble this time around by trusting the regulators to do what they failed to do in the first place?"

Our financial system has become dominated by institutions that are not only "too big to fail," but also, as FDIC Chairman Bill Isaac describes, "too big to manage, and too big to regulate." The banking industry has become so concentrated that it no longer functions as a competitive market, leading to ever-higher levels of risk in the system. The six largest U.S. banks now have total assets estimated to be in excess of 63 percent of our GDP. The gigantic size of megabanks, and the perception in the marketplace that they are indeed too big for the government ever to permit them to fail, gives these megabanks a competitive advantage over smaller financial institutions.

The cost is staggering-as much as $33,000 for every single taxpayer since 2007. Federal agencies have disbursed $4.6 trillion dollars to support the financial sector since the meltdown in 2007-2008; that's at least four times what has been spent in the wars in Iraq and Afghanistan since 2001.

The amendment would limit the size of these megabanks by:
• Imposing a strict 10% cap on any bank-holding-company's share of the United States' total insured deposits.
• Limits the size of non-deposit liabilities at financial institutions (to 2% of United States GDP for banks, and 3% of GDP for non-bank institutions).
• Sets into law a 6% leverage limit for bank holding companies and selected nonbank financial institutions.

These caps are both sensible and deficit-neutral, and are large enough to allow effective economies of scale. Having fewer and bigger banks has not improved lending. Having more banks will create competition and increase the volume of lending, and proper incentives will entice banks to lend the right way again.

The idea of size caps is supported by Thomas Hoenig, President of the Kansas City Fed; Paul Volcker, former Chairman of the Federal Reserve; Mervyn King, Governor of the Bank of England; Richard Fisher, president of the Dallas Fed; Robert Reich, Secretary of Labor under former President Clinton; and commentator Arnold Kling of the National Review.


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