WASHINGTON, D.C.—Following the release of the first of two reports by the U.S. Government Accountability Office (GAO) on the federal government’s bailout of large financial institutions during the 2007-2008 financial crisis, U.S. Sens. Sherrod Brown (D-OH) and David Vitter (R-LA) today reaffirmed their call for imposing capital requirements for Wall Street megabanks. Brown and Vitter, who requested that GAO conduct the investigations, are authors of the Terminating Bailout for Taxpayer Fairness Act, legislation that would require the largest and most interconnected financial institutions to maintain a 15 percent capital ratio to ensure taxpayers will not serve as the backstop for risky investments. The GAO report found that Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase & Co., Morgan Stanley, and Wells Fargo & Co were able to borrow below-market interests rates, demonstrating yet another economic benefit of being “Too Big to Fail.”
“Hardworking Ohioans should not be on the hook for the risky behavior by Wall Street banks,” Brown said. “Today, the nation’s four largest banks are nearly $2 trillion larger than they were in 2007 – aided by an implicit government guarantee awarded by virtue of their ‘too big to fail’ status. If big banks want to continue risky practices, they should do so with their own equity on the line. Today’s report underscores the need to pass our legislation to ensure that these types of bailouts will not happen in the future by imposing sensible capital requirements.”
“Eliminating the megabanks federal handouts – and addressing the problem of ‘too big to fail’ financial institutions – is a simple matter of common sense,” Vitter said. “This report highlights that the megabanks have been growing at an unacceptable $2 trillion pace since the financial meltdown – largely on the backs of U.S. taxpayers. We’ll continue fighting to protect the taxpayers from financial risks by implementing a systemic solution, increasing the minimum amount of capital the megabanks are required to have.”
Brown and Vitter requested the GAO report to study the actual or perceived economic benefits the “too-big-to-fail” megabanks received. The report confirms that banks and bank holding companies with assets over $50 billion were the predominate beneficiaries of taxpayer funded bailouts and relied more heavily on short-term funding markets compared to small or community based banks.
Despite receiving assistance from taxpayers in 2008, today, the nation’s four largest banks—JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo—are nearly $2 trillion larger today than they were before the crisis. Their growth has been aided by an implicit guarantee—funded by taxpayers and awarded by virtue of their size—as the market knows that these institutions have been deemed “too big to fail.” Brown and Vitter have asked the GAO to investigate whether this allows the nation’s largest megabanks to borrow at a lower rate than regional banks, community banks, and credit unions.
Brown and Vitter’s Terminating Bailouts for Taxpayer Fairness Act (TBTF Act) would eliminate government subsidies to megabanks, ensuring financial institutions have adequate capital to protect against losses. The TBTF Act would additionally set reasonable capital standards that reflect the size and complexity of the institution and provide regulatory relief for community banks.
The second part of the study will be released in 2014 and will focus on the funding advantages enjoyed by the largest banks, by virtue of their “Too Big to Fail” status.