Commentary and musings on the complex, fascinating and peculiar world that is securities regulation
Sunday, February 17, 2013
House Leader Introduces Legislation to End Too Big to Fail
John Campbell (R-CA), Chairman of the Financial Services Subcommittee on
Monetary Policy, has introduced theSystemic
Risk Mitigation Act, H.R. 613, to eliminate the problem of too
big to fail. Currently, certain financial institutions, by nature of their
size, scope and interconnectivity, are deemed
too big to fail as their potential insolvency would result in systemic
economic collapse. Therefore, these institutions carry the implicit guarantee
of massive, taxpayer-funded bailouts in the event of catastrophic failure. As a
comprehensive reform measure, theSystemic
Risk Mitigation Act would clearly articulate the lines between
private sector risk and the taxpayers by means of significantly ratcheting up
capital requirements for large financial institutions.
Too Big to Fail. According to Chairman
Campbell, the legislation will disconnect the taxpayer from the
implicit guarantee currently perpetuating a system built on future
bailouts. It will build a wall of private capital between the banking
sector and the taxpayers. It will make the banking system more transparent,
accountable, competitive, and stable.
TheSystemic Risk Mitigation
Actwould set up a comprehensive regulatory structure
requiring financial institutions to hold a second layer of capital for the
purpose of minimizing the extent to which their failure would precipitate
broader market and economic turmoil. Under this new structure, large financial
institutions will be required to hold substantially more capital. In the event
of a failure, investors will be explicitly denied any bailout and would only be
repaid after all other systemically important and secured debts are satisfied.
the legislation, the Federal Reserve, in its role as a regulator of large
financial institutions, would be required to monitor markets for signs of
diminished confidence in an institution’s ability to satisfy claims by
investors. Should a financial institution become undercapitalized, the
Federal Reserve would be empowered to intervene in order to notify the
institution of the deficiency, conduct stress tests, and oversee the
implementation of remediation plans. In the event that an institution is unable
to raise sufficient capital, The Systemic Risk Mitigation
it into receivership.
this legislation gives financial institutions, not policymakers, the final
decision on how they will decide to structure themselves. TheSystemic Risk Mitigation Actdoes not force a financial institution
to break itself up, but does require that it operate in a manner that is safe,
accountable, and independent of any reliance on the U.S. taxpayer.
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