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Sunday, September 25, 2016

The unlikely pair of progressive Sherrod Brown (D-OH) and conservative David Vitter (R-LA) are set to take their campaign against “too big to fail” banks to the next level. This week they will introduce a new bill that will go much further than the Dodd-Frank financial reform in shrinking the risks presented by the big banks, which are bigger now than before the financial crisis of 2008. A draft of the bill leaked last week.

The legislation will reportedly require all banks to keep capital equal to 10 percent of their assets at all times. Those with assets of more than $400 billion would be obligated to hold up to 15 percent.

Who’s against such taking such modest-sounding precautions to prevent another global financial crisis that would require another bailout or the total collapse of the global economy? The big banks, of course.

The Motley Fool‘s Amanda Alex explains:

According to Goldman Sachs, U.S. banks, in totality, would be required to hold an extra $1.1 trillion in equity to satisfy this new rule. The effect of this huge cushion would be a reduction in return on equity from 11% to 5%, as well as a 25% drop in funds available for lending — taking $3.8 trillion out of the lending pipeline. According to Goldman, bulking up to this extent would take the systemically important institutions approximately 12 years to achieve — but the law would allow only five.

You’ll note the bill doesn’t actually break up the big banks or reinstate Glass-Steagall — the New Deal-era law that separated commercial and investment lending that was repealed in 1999. It simply sets capital requirements, something Treasury Secretary Timothy Geithner opposed during the drafting of Dodd-Frank.

Still, the banks are saying the bill is radical and would hurt an economy that’s still trying to recover from the last financial crisis. They claim capital requirements are already too high.

The editors at BloombergView — which exposed the $83 billion implied subsidy that big banks receive by virtue of the expectation that they’d be bailed out if they failed — disagree:

It would be more accurate to say the current level of equity at the largest U.S. banks is comically low. The typical U.S. enterprise has equity of about 70 percent of assets. Research by economists at the Bank of England and a new book by financial economists Anat Admati and Martin Hellwig suggest that banks need equity of at least 20 percent to avoid failures. Under international accounting standards, which are more stringent than U.S. rules, the five largest U.S. banks by assets — JPMorgan Chase & Co, Citigroup Inc., Bank of America Corp., Morgan Stanley and Goldman Sachs Group Inc. — had an average tangible equity ratio of only 3.2 percent as of mid-2012. At the same time, they commanded more than $14 trillion in assets, almost equal to the U.S. economy’s entire annual output.

The size of our big banks has already crushed our economy and then helped prevent the government from prosecuting those who were behind the financial crisis. The Brown-Vitter bill is a sign that Washington may be ready to do something about this.

Photo: Matthew Knott via Flickr.com

  • Lynda Groom

    I will believe it when I see it. This legislative clown show has been teasing the nation with so-call bipartisan bills off and on again for years…with very little to show for it. Action speaks much louder than words and little in the action is coming from that group.

  • TZToronto

    What would anyone expect a big bank to say? Anything that might hurt their bottom line, make their shareholders angry, and result in executives losing their jobs, perks, paychecks and outrageous bonuses will be painted as unachievable and bad for the economy. Speaking of bad for the economy . . . they are.

  • We need a principled and courageous person to champion this legislation. Elizabeth, we are counting on you.

  • I want the big wigs in jail!!

    • ralphkr

      Too late…statute of limitations has now co-opted that remedy.

  • howa4x

    the senate is too corrupt to go along. Sen. Chuck Schumer is a big backer of Wall st as it is and so are a lot of other ones. this will be the gun bill all over again