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Monday, December 09, 2019

Bipartisan Bill To Tame ‘Too Big To Fail’ Banks Coming This Week

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big banks or reinstate Glass-Steagall — the New Deal-era law that separated commercial and investment lending that was repealed in 1999.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

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