Ending Taxpayer Bailouts and Supporting Community Banks

Many Ohioans would be shocked to find out that the same Wall Street megabanks which received bailouts from taxpayers five years ago, at the height of the financial crisis, continue to receive taxpayer-funded advantages today simply because of their “too big to fail” status.

And while these megabanks receive an implied federal guarantee provided by taxpayers at no charge, “too small to save” community banks in towns across Ohio have been allowed to fail. This taxpayer-supplied subsidy is wrong, and it puts community banks in Ohio, and across the nation, at a competitive disadvantage. Millions of families and small businesses depend on their community banks for their savings accounts, home mortgages, and business loans. Community banks help create countless jobs and provide safe and reliable financing options to Ohio’s families. They deserve a chance to compete on a level playing field.

But because Wall Street megabanks know that the government will bail them out if they ever again reach the point of collapse, they have access to cheaper funding and more favorable borrowing terms than dependable Main Street institutions like Huntington Bank or The Peoples Bank in Coldwater, Ohio.

Megabanks are viewed as having the ultimate insurance policy – one with no coverage limits or premiums. This funding advantage has now been confirmed by three independent studies in the last year, one of them quantifying the subsidy at $83 billion per year. We have a financial system that rewards banks for their size, not the quality of their operations. Simply put, it's a “heads megabanks win, tails taxpayers lose” scenario that squashes innovation and competition and is distinctly un-American. 

That’s why my Republican colleague, Senator David Vitter from Louisiana, and I introduced the Terminating Bailouts for Taxpayer Fairness Act (TBTF) Act last week. Our bill sets forth a plan that would prevent any one financial institution from becoming so risky and overleveraged that it could put our economy on the brink of collapse or trigger the need for a federal bailout.

First, our bill will ensure that all banks have enough investor equity to back up their sometimes risky practices – so taxpayers don’t have to. Adequate equity levels lessen the likelihood that an institution will fail and lower the costs to the rest of the financial system and the economy if it does. Our bill will end corporate welfare enjoyed by Wall Street banks by setting reasonable standards depending on the size and complexity of the institution.

Next, our bill will limit the government safety net – the assistance provided by Federal Reserve lending and Federal Deposit Insurance Corporation (FDIC) insurance – to traditional banking operations. Specifically, financial institutions would be prohibited from transferring nonbank liabilities – like derivatives, repurchase agreements, and securities lending– into federally-supported banks. This will ensure that the government safety net begins and ends at the commercial bank.  If megabanks want to be large and complex, that’s their choice – but we don’t have to subsidize their risk-taking.  If they fail, their executives and investors – not taxpayers – should pay the price.

Finally, our bill will provide sensible regulatory relief for community banks.  Because community institutions do not have large compliance departments like Wall Street institutions, our legislation proposes commonsense measures to lessen the load on our local banks. Leveling the playing field won’t help if our community banks are driven out of business by compliance costs.

 We shouldn’t wait for another economic crisis before we take action. We owe it to Ohio families—and families across the country—to guarantee that Wall Street megabanks will never again gamble away the American dream.