Wednesday, March 06, 2013

Bi-Partisan and Scalable Senate Legislation Being Readied to End Too Big to Fail

Senators Sherrod Brown and David Vitter are preparing bi-partisan legislation that will create a two-tier scalable regulatory framework for financial institutions and end too big to fail. In remarks on the Senate floor, Senator Vitter said that the legislation, which will soon be introduced, will try to walk federal  regulator away from Basel III and institute new capital rules that do not rely on risk weights and are simple and easy to understand and are transparent and cannot be gamed the way the Senators think the  Basel III Accord can be manipulated and gamed.  In the view of the Senators, requiring this would do one or both of two things. It would better ensure the taxpayer against bailouts and/or  it would push the large global financial institutions  to restructure because they would be bearing more cost of that risk to the financial system. (Cong. Record, Feb, 28, 2013, S. 996).

In addition, the legislation  will be scalable and crate a two-tier system under which smaller and to pay less risky financial institutions, such as community banks  would be subject to a  more appropriate regulatory framework. The legislation  will also fundamentally require significantly more capital for the large financial institutions and distinguish between those institutions and other financial firms, such as namely, community banks, midsized banks, and regional banks. The largest financial institutions  would have to pay significantly higher capital requirements under the Brown-Vitter bill.

When these large financial institutions  go into the capital markets, noted Senator Brown, they get the advantage of up to  80 basis points because the capital markets believe their investments in thesefirms are not very risky because the markets believe that they  are too big to fail. Cong Rec. Feb 28, 2013, S. 966).

While Senator  Brown’s proposed amendment, S.Amdt. No. 3733,       to the Dodd-Frank Act to impose leverage and liability limits on bank holding companies and financial companies failed in 2010 in the runup to the passage of the Act was defeated by a vote of 61-33, the Senators believe that a strong consensus is building today towards passage of similar legislation. Three Republican Senators voted for the Brown Amendment, and that did not include Senator Vitter, who did not vote on the amendment. They pointed out that Senator Elizabeth Warren has joined the Senate and is expected to be a strong proponent of the legislation.

Just as Senator Sherman spoke against the trusts in the late 19th century, noted Senator Brown, today people across the political spectrum, both parties and all ideologies, are speaking about the dangers of the large, concentrated wealth of large financial institutions.According to the Comptroller of the Currency, said Senator Brown, none of these large financial holding companies have  adequate risk management.. In stress tests, not one of the largest 19 financial institutions  has shown adequate risk management.