Brown, Vitter: Weakened Basel III Standards Hasten Need To Pass Bipartisan Bill Ending "Too Big To Fail"

WASHINGTON, D.C. – U.S. Sens. Sherrod Brown (D-OH) and David Vitter (R-LA) today responded to the weakened leverage ratio announced yesterday by the Basel Committee on Banking Supervision. 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.

“Yesterday’s announcement placed further chinks in an already too weak armor meant to guard against risky, over-leveraged financial institutions putting our economy on the brink of collapse,” Brown said. “The watering down of the Basel III leverage ratio further shows why the U.S. should lead rather than follow when it comes to protecting the safety and soundness of our financial system. We must pass our bipartisan plan to ensure that the largest financial institutions have adequate capital to cover their losses.”

“Heavy lobbying from the Wall Street megabanks representing international banking regulators led to watered down leverage ratio standards,” Vitter said. “Quite frankly, it’s dangerous and understates the risks in the system. We need to be bold and set an example in the U.S. – and show that a strong increased leverage ratio is better for the safety of our financial system. The regulators should stop wasting time and should finalize a stronger version of their proposed supplementary leverage ratio as soon as possible.”

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.  Together, Brown and Vitter have successfully pressed the Government Accountability Office (GAO) to conduct a study of the economic benefits that the “too-big-to-fail” megabanks receive as a result of actual or perceived taxpayer funded support.

Brown-Vitter, or 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.

  • Mid-sized and regional banks would be required to hold eight percent in capital to cover their assets
  • Megabanks – institutions with more than $500 billion in assets – would be required to meet a new 15 percent capital requirement
  • Community banks would remain unchanged by the legislation, as the market already requires them to maintain capital ratios approaching 10 percent of their assets

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.

  • Expands the definition of “rural” lenders that can offer balloon mortgages
  • Reduces some impediments for small banks and thrifts to raise capital or pay dividends.
  • Creates an independent bank examiner ombudsman that institutions can appeal to if they feel that they have been treated unfairly by their examiner.
  • Adopts privacy notice simplification legislation.

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