WASHINGTON, D.C. – U.S. Sens. Sherrod Brown (D-OH) and David Vitter (R-LA) today sent a letter urging the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) to strengthen their proposed supplementary leverage ratio in order to reduce future government support, eliminating the possibility of “too big to fail” policies. Their letter comes in response to the weakened leverage ratio announced by the Basel Committee on Banking Supervision this week.
“The U.S. should lead rather than follow when it comes to protecting the safety and soundness of our financial system. U.S. regulators took an important step in the right direction last year, but they must strengthen leverage ratios to ensure that the largest financial institutions have adequate capital to cover their losses,” Brown said.
“It’s a sad but clear fact that ‘too big to fail’ is alive and well, and the Wall Street megabanks are lobbying to keep it that way,” Vitter said. “Regulators need to stop wasting time and push for a strong increased leverage ratio – which is necessary for the safety of our financial system. They took a positive step this summer, but the Basel recommendation should not give them cover to go backwards on increasing capital.”
Brown and Vitter are the sponsors of the Terminating Bailouts for Taxpayer Fairness Act (TBTF Act), bipartisan legislation which would ensure that financial institutions have adequate capital to protect against losses.
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.” This allows the nation’s largest megabanks to borrow at a lower rate than regional banks, community banks, and credit unions. This funding advantage, which has been confirmed by three independent studies in the last year, is estimated to be as high as $83 billion per year.
The Terminating Bailouts for Taxpayer Fairness Act (TBTF Act) would ensure that financial institutions have adequate capital to protect against losses. Specifically, the TBTF Act would:
Set reasonable capital standards that would vary depending on the size and complexity of the institution. Economic and financial experts agree that adequate capital is critical to financial stability, reducing the likelihood that an institution will fail and lowering the costs to the rest of the financial system and the economy if it does.
Limit the government safety net to traditional banking operations. When the government established the Federal Reserve in 1913 as a lender of last resort and created deposit insurance in response to the Depression, support was intended for commercial banks that provided savings products and loans to American consumers and businesses. At that time, most banks had enough shareholder equity equal to 15 to 20 percent of their assets. In the ensuing decades, the expanding federal safety net allowed financial institutions to depend less and less on their own capital. Federal support was stretched far beyond its original focus, particularly when financial institutions were permitted to enter into the business of insurance, securities dealing, and investment banking. Brown and Vitter’s bill would limit the government safety net to traditional banking operations, protecting commercial banks rather than risky, investment banking activities.
Provide regulatory relief for community banks. By reducing regulatory burdens upon community banks, they can better compete with mega institutions. Because community institutions do not have large compliance departments like Wall Street institutions, this legislation provides commonsense measures to lessen the load on our local banks.
The text of the letter is below:
January 16, 2014
The Honorable Ben S. Bernanke
Board of Governors of the
Federal Reserve System
Washington, D.C. 20551
The Honorable Thomas J. Curry
Comptroller of the Currency
Administrator of National Banks
Washington, D.C. 20219
The Honorable Martin J. Gruenberg
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Dear Chairman Bernanke, Chairman Gruenberg, and Comptroller Curry:
Last November, we wrote you encouraging you to strengthen your proposal for a supplementary leverage ratio in order to reduce future government support and “too big to fail” policies. At the time, we noted that your proposal needed to be strengthened. Sunday’s news that global regulators have watered down their new rules at the behest of intense industry lobbying is further evidence that the United States needs to lead by example rather than follow and adopt its own aggressive Supplementary Leverage Ratio to protect our financial system.
According to a recent Bloomberg News report, the Federal Reserve “has decided to delay imposing limits on leverage at eight of the biggest U.S. financial institutions until a global agreement is completed, according to two people briefed on the discussions.” The news report indicates that the Fed officials want to wait for the Basel Committee on Banking Supervision to finish their rule before banking regulators complete their own capital requirements for U.S. banks. The Federal Reserve, it seems, has sided with the trade associations representing the largest banks, who have argued for delaying the new U.S. bank capital rules.
Last week in the Senate Banking Committee, we heard testimony on this issue from a number of expert witnesses – all of whom agreed that the U.S. should lead by example and adopt a strong leverage ratio rather than follow. Former Federal Reserve Bank of Dallas Vice President Harvey Rosenblum testified that, “we are the largest economy and the most important economy in the world with the financial system that the rest of the world depends upon, and we need the healthiest and safest banking and financial system in the world in order to lead the world. And, therefore, I do not think we should wait on the least common denominator coming up with what they think is right. We ought to do what we think is right, and the others I think will have to follow.”
Cheerleaders and lobbyists for the megabanks have argued that this will place U.S. banks at a competitive disadvantage with their global competition. Dr. Allan Meltzer testified at the same hearing that he found that argument “hard to accept.” If, as Dr. Meltzer pointed out, other countries don’t initially follow our lead on a leverage ratio the megabanks in the United States “have subsidiaries overseas, so if the rules in the United States are strict and prevent them from making loans overseas, they can make them from their overseas subsidiaries.”
It is a sad fact that “too big to fail” is alive and well. You, as this country’s federal banking regulators, have an opportunity to use your authorities to enhance capital and reduce leverage at the largest financial firms. This is the best way to finally end “too big to fail.” We urge you to act now to strengthen your proposal and begin implementing it as soon as is practicable.
Sherrod Brown David Vitter
United States Senate United States Senate