WASHINGTON D.C. – U.S. Sens. Sherrod Brown (D-OH) Ted Kaufman (D-DE), Robert P. Casey (D-PA), Sheldon Whitehouse (D-RI), and Tom Harkin (D-IA) today announced new legislation today that would place reasonable caps on the size of our nation’s behemoth financial institutions. Their bill, The SAFE Banking Act of 2010, would also ensure that banks have the resources to cover their losses. The senators explained why Wall Street reform is needed to hold Wall Street accountable, prevent future bailouts, and protect American homes, jobs, pensions, and businesses.
“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.”
“We can either limit the size and leverage of 'too big to fail' financial institutions now, or we will suffer the economic consequences of their potential failure later," said Kaufman. Breaking apart too-big-to-fail banks is the necessary first step in preventing another cycle of boom-bust-and-bailout. This debate is a test of whether the power of that idea can spread and gain support," Kaufman added. "Though it is clearly the safest way to avoid another financial crisis, this idea must overcome tremendous resistance from Wall Street banks and their politically powerful campaigns against structural financial reform. Moreover, the idea must overcome the inertia and caution in a Congress drawn to easier ideas that may work. But how much should we gamble that they will work? Limiting size and leverage are redundant fail-safe provisions to prevent a dangerous outcome. Senator Brown and I are proposing a complementary idea, not a substitute."
The nation’s 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 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 lack of competition in the banking industry leads to ever-higher levels of risk in the system.”
The financial sector has received nearly $4.6 trillion in taxpayer support since the Wall Street meltdown in 2007-08. That figure represents at least four times what has been spent in the wars in Iraq and Afghanistan since 2001.
The Safe Banking Act of 2010 would limit the size of megabanks by:
• Imposing a strict 10 percent cap on any bank-holding-company’s share of the United States’ total insured deposits;
• Reducing the maximum amount of non-deposit liabilities at financial institutions (to two percent of United States GDP for banks, and three percent of GDP for non-bank institutions);
• Setting into law a six-percent leverage limit for bank holding companies and selected nonbank financial institutions.
The SAFE Banking Act would also help boost lending to small businesses. The dominance of a few megabanks has helped to contribute to a virtual freeze of lending to small businesses, which create approximately 64 percent of new jobs. Over the last year, banks have been decreasing their consumer and small business lending, including Small Business Administration (SBA) loans. The three biggest banks reduced their 7(a)-SBA lending by 86 percent from 2008 to 2009), while increasing their investments in securities by almost 23 percent. Having more banks will create competition and increase small business lending so that our economy can grow.
Components of the SAFE Act – particularly size caps – are supported by an ideologically-diverse group of economists. 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.
Brown and Kaufman held a news conference call today with The Main Street Alliance, a consortium of small businesses committed to Wall Street Reform. The Main Street Alliance released a letter signed by 117 small business owners from 23 states calling on Congress to enact comprehensive financial reform that contains 3 pillars: enacting an independent consumer financial protection agency, ending "too big to fail" banking , and ending proprietary trading. The letter argues that without these three things, small businesses will continue to be at the mercy of risky Wall Street speculation that destroyed our economy, cost 8 million people their jobs, and forced untold numbers of small businesses into bankruptcy.
David Borris of the Main Street Alliance said, "We have built our business on a 25 year old foundation of honesty, transparency, and a deep commitment to serving our local community. Wall Street has broken our trust, and if we don't take this opportunity to reign in the abusive and reckless practices we will only be sowing the seeds of another crisis. We, America's small businesses, who suffer the brunt of these crises, deserve more of our elected representatives. Stand with us and pass comprehensive financial reform, including an independent consumer financial protection agency."