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6th April 2013, 12:35 AM
Senate Bill Would Rein In Too Big To Fail Banks, Draft Reveals Quartz | By Tim Fernholz Posted: 04/05/2013 5:17 pm EDT
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Quartz: (http://qz.com/71533/a-new-bipartisan-bill-would-end-basel-iii-and-hike-bank-capital-requirements-to-10/)
Senate staff are reviewing a draft of banking legislation that would raise equity funding requirements for financial institutions, pull the United States out of the Basel III accord, and further restrict the Federal Reserve’s ability to bail out the shadow banking sector.
The draft, which you can read below, was prepared by the staff of Democratic senator Sherrod Brown, who is expected to be joined by Republican senator David Vitter in endorsing a final version of the legislation later in April. The two legislators co-sponsored a symbolic amendment calling on the government to end subsidies to the largest banks; it passed the Senate 99-0.
But the two senators promised a full package, and now we have a look at the first draft, shared anonymously with Quartz by staff from a third legislator’s office. Neither putative sponsor has returned calls for comment.
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The draft calls for bank regulators to look to the 19th century—before the Federal Reserve, deposit insurance and the income tax—when setting capital equity levels, and seems to rule out risk-weighting as a way to dilute the rules. By that standard, none of America’s largest banks would have reached the bill’s proposed minimum capital requirement of 10% in the second quarter of last year (http://www.fdic.gov/about/learn/board/hoenig/capitalizationratios.pdf)(pdf). And that’s not even counting the additional 5% capital surcharge on banks with more than $400 billion in assets.
Bank capital has been a touchstone of the post-crisis regulatory debate, with advocates of safer banking demanding a larger cushion of safety (http://qz.com/65869/your-bank-isnt-much-safer-than-the-ones-that-failed-in-cyprus/) to counteract subsidies, while financial institutions warn that raising more money from investors, rather than borrowing (for instance, from depositors), will make their loans more expensive.
More broadly, the bill would end US implementation of the Basel III accord, which is also intended to raise capital for banks, but is mistrusted by many financial reform advocates who think banks will find its standards easy to manipulate. If the US doesn’t participate in Basel III, however, it would be a blow to efforts to coordinate global financial regulation.
The Brown-Vitter legislation would make it a violation of the rules surrounding federal deposit insurance to try to financially engineer away the capital requirements. It would also limit the Fed’s ability to bail out non-bank financial institutions, a key complaint from the crisis in 2008.
While the draft legislation has a long way to go before it becomes law, it is symbolic of a mini-boom of interest on the left and right in further reining in banks. This has been motivated by the JP Morgan “whale” scandal, failures in Cyprus, and continued political pressure to improve a struggling economy.
While the appetite for reform may exist in Congress—Brown has suggested this bill may attract 50 or 60 votes—the Obama White House is reluctant to tackle the bill while the new rules created just three years ago by the Dodd-Frank financial overhaul are still being implemented. A former Treasury official warns that opening up financial reform could become a field day for financial sector lobbyists seeking to attack other parts of the bill, including the new consumer protection agency. But reformers tend to say the process is taking too long, and that waiting for safer banks is too risky for the economy.
Here is the text of the draft legislation:
Brown-Vitter Draft (http://www.scribd.com/doc/134274502)
Also on HuffPost:
Loading Slideshowhttp://www.huffingtonpost.com/images/ajax-loader.gif
Sanford "Sandy" WeillThe former <a href="http://www.huffingtonpost.com/2012/07/25/sandy-weill-cnbc-break-up-big-banks_n_1701274.html">Citigroup Chairman and CEO told CNBC in 2012 that</a> "we should probably... split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, and have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail."
John ReedRetired Citigroup chairman <a href="http://www.nytimes.com/2009/10/23/opinion/l23volcker.html?_r=0">John S. Reed wrote to the New York Times in 2009</a>: "Some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense."
Phil PurcellPhil Purcell, former chairman and CEO of Morgan Stanley, <a href="http://online.wsj.com/article/SB10001424052702304765304577480743265772620.html" target="_hplink">argued in a Wall Street Journal op-ed</a> that the big banks should break their divisions up into separate firms. "These businesses should be spun off to give the value to shareholders and let investment banks be owned privately -- hopefully largely by employees... so that the interests of the owners and bankers are aligned," he wrote.
David KomanskyFormer Merill Lynch CEO, David Komansky, is another former megabank CEO calling for the breakup of "too big to fail" banks, <a href="http://economix.blogs.nytimes.com/2012/08/02/under-pressure-megabanks-rely-on-three-myths/" target="_hplink">according to Simon Johnson.</a> Komansky told Bloomberg TV that he <a href="http://www.bloomberg.com/video/59862858-komansky-says-he-regrets-role-in-glass-steagall-repeal.html" target="_hplink">"regrets" calling for the repeal of Glass-Steagall,</a> which allowed banks to become bigger than ever.
Sallie KrawcheckFormer Citigroup CFO Sallie Krawcheck has argued that big banks are simply <a href="http://www.huffingtonpost.com/2012/06/12/sallie-krawcheck-jpmorgan-chase-loss_n_1588989.html" target="_hplink"> too complex to manage.
Richard ParsonsAfter announcing the end of his 16-year tenure on the board of <a href="http://www.bloomberg.com/news/2012-04-19/parsons-blames-glass-steagall-repeal-for-crisis.html">Citigroup, Richard Parsons told Bloomberg</a>, "to some extent what we saw in the 2007, 2008 crash was the result of the throwing off of Glass-Steagall. Have we gotten our arms around it yet? I don't think so because the financial-services sector moves so fast."
Scott ShayScott Shay, the founder and chairman of Signature Bank, wrote in American Banker that <a href="http://www.americanbanker.com/bankthink/the-absurdity-of-too-big-to-fail-banking-1052812-1.html?zkPrintable=1&nopagination=1">"reinstating Glass Steagall should be the highest priority"</a> for financial regulators.
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Quartz: (http://qz.com/71533/a-new-bipartisan-bill-would-end-basel-iii-and-hike-bank-capital-requirements-to-10/)
Senate staff are reviewing a draft of banking legislation that would raise equity funding requirements for financial institutions, pull the United States out of the Basel III accord, and further restrict the Federal Reserve’s ability to bail out the shadow banking sector.
The draft, which you can read below, was prepared by the staff of Democratic senator Sherrod Brown, who is expected to be joined by Republican senator David Vitter in endorsing a final version of the legislation later in April. The two legislators co-sponsored a symbolic amendment calling on the government to end subsidies to the largest banks; it passed the Senate 99-0.
But the two senators promised a full package, and now we have a look at the first draft, shared anonymously with Quartz by staff from a third legislator’s office. Neither putative sponsor has returned calls for comment.
More Stories On Quartz:
-- Yale senior: We millennials don’t stand a chance (http://qz.com/70400/yale-senior-we-millennials-dont-stand-a-chance/)
-- Can decorative pillows save JC Penney? (http://qz.com/71297/can-decorative-pillows-save-jc-penney/)
-- The art of recruiting a software developer (http://qz.com/70905/the-art-of-recruiting-a-software-developer/)
-- The JOBS Act turns one, and let’s be honest, it’s a failure (http://qz.com/71129/the-jobs-act-turns-one-and-lets-be-honest-its-a-failure/)
The draft calls for bank regulators to look to the 19th century—before the Federal Reserve, deposit insurance and the income tax—when setting capital equity levels, and seems to rule out risk-weighting as a way to dilute the rules. By that standard, none of America’s largest banks would have reached the bill’s proposed minimum capital requirement of 10% in the second quarter of last year (http://www.fdic.gov/about/learn/board/hoenig/capitalizationratios.pdf)(pdf). And that’s not even counting the additional 5% capital surcharge on banks with more than $400 billion in assets.
Bank capital has been a touchstone of the post-crisis regulatory debate, with advocates of safer banking demanding a larger cushion of safety (http://qz.com/65869/your-bank-isnt-much-safer-than-the-ones-that-failed-in-cyprus/) to counteract subsidies, while financial institutions warn that raising more money from investors, rather than borrowing (for instance, from depositors), will make their loans more expensive.
More broadly, the bill would end US implementation of the Basel III accord, which is also intended to raise capital for banks, but is mistrusted by many financial reform advocates who think banks will find its standards easy to manipulate. If the US doesn’t participate in Basel III, however, it would be a blow to efforts to coordinate global financial regulation.
The Brown-Vitter legislation would make it a violation of the rules surrounding federal deposit insurance to try to financially engineer away the capital requirements. It would also limit the Fed’s ability to bail out non-bank financial institutions, a key complaint from the crisis in 2008.
While the draft legislation has a long way to go before it becomes law, it is symbolic of a mini-boom of interest on the left and right in further reining in banks. This has been motivated by the JP Morgan “whale” scandal, failures in Cyprus, and continued political pressure to improve a struggling economy.
While the appetite for reform may exist in Congress—Brown has suggested this bill may attract 50 or 60 votes—the Obama White House is reluctant to tackle the bill while the new rules created just three years ago by the Dodd-Frank financial overhaul are still being implemented. A former Treasury official warns that opening up financial reform could become a field day for financial sector lobbyists seeking to attack other parts of the bill, including the new consumer protection agency. But reformers tend to say the process is taking too long, and that waiting for safer banks is too risky for the economy.
Here is the text of the draft legislation:
Brown-Vitter Draft (http://www.scribd.com/doc/134274502)
Also on HuffPost:
Loading Slideshowhttp://www.huffingtonpost.com/images/ajax-loader.gif
Sanford "Sandy" WeillThe former <a href="http://www.huffingtonpost.com/2012/07/25/sandy-weill-cnbc-break-up-big-banks_n_1701274.html">Citigroup Chairman and CEO told CNBC in 2012 that</a> "we should probably... split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, and have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail."
John ReedRetired Citigroup chairman <a href="http://www.nytimes.com/2009/10/23/opinion/l23volcker.html?_r=0">John S. Reed wrote to the New York Times in 2009</a>: "Some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense."
Phil PurcellPhil Purcell, former chairman and CEO of Morgan Stanley, <a href="http://online.wsj.com/article/SB10001424052702304765304577480743265772620.html" target="_hplink">argued in a Wall Street Journal op-ed</a> that the big banks should break their divisions up into separate firms. "These businesses should be spun off to give the value to shareholders and let investment banks be owned privately -- hopefully largely by employees... so that the interests of the owners and bankers are aligned," he wrote.
David KomanskyFormer Merill Lynch CEO, David Komansky, is another former megabank CEO calling for the breakup of "too big to fail" banks, <a href="http://economix.blogs.nytimes.com/2012/08/02/under-pressure-megabanks-rely-on-three-myths/" target="_hplink">according to Simon Johnson.</a> Komansky told Bloomberg TV that he <a href="http://www.bloomberg.com/video/59862858-komansky-says-he-regrets-role-in-glass-steagall-repeal.html" target="_hplink">"regrets" calling for the repeal of Glass-Steagall,</a> which allowed banks to become bigger than ever.
Sallie KrawcheckFormer Citigroup CFO Sallie Krawcheck has argued that big banks are simply <a href="http://www.huffingtonpost.com/2012/06/12/sallie-krawcheck-jpmorgan-chase-loss_n_1588989.html" target="_hplink"> too complex to manage.
Richard ParsonsAfter announcing the end of his 16-year tenure on the board of <a href="http://www.bloomberg.com/news/2012-04-19/parsons-blames-glass-steagall-repeal-for-crisis.html">Citigroup, Richard Parsons told Bloomberg</a>, "to some extent what we saw in the 2007, 2008 crash was the result of the throwing off of Glass-Steagall. Have we gotten our arms around it yet? I don't think so because the financial-services sector moves so fast."
Scott ShayScott Shay, the founder and chairman of Signature Bank, wrote in American Banker that <a href="http://www.americanbanker.com/bankthink/the-absurdity-of-too-big-to-fail-banking-1052812-1.html?zkPrintable=1&nopagination=1">"reinstating Glass Steagall should be the highest priority"</a> for financial regulators.
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