Sunday, July 14, 2013

While Applauding Regulatory Adoption of Leverage Ratios, Senators Brown and Vitter Say Legislation to End TBTF Still Needed

Senators Sherrod Brown (D-OH) and David Vitter (R-LA) applauded the plans of federal regulators to increase the mandatory leverage ratio for financial institutions while at the same time stating that their legislation, the Terminating Bailouts for Taxpayer Fairness Act (TBTF Act), must still be passed to ensure that financial institutions have adequate capital to protect against losses and end too-big-to-fail. The increase in the leverage ratio is a major step forward, said the Senators, but it is only the first step.

Despite receiving assistance from taxpayers in 2008, today, noted the Senators, the nation’s four largest financial institutions, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, are nearly $2 trillion larger today than they were before the crisis. Their growth has been aided by an implicit guarantee, said the Senators, funded by taxpayers and awarded by virtue of their size, and the market knows that these institutions have been deemed “too big to fail.” This allows the largest financial institutions to borrow at a lower rate than regional banks, community banks, and credit unions. This funding advantage, which has been confirmed by three independent studies in the last year, is estimated to be as high as $83 billion per year.

Senators Brown and Vitter reaffirmed their strong commitment to the Terminating Bailouts for Taxpayer Fairness Act (TBTF Act), which would set reasonable capital standards that would vary depending on the size and complexity of the financial institution. Economic and financial experts agree that adequate capital is critical to financial stability, reducing the likelihood that an institution will fail and lowering the costs to the rest of the financial system and the economy if it does. Under the legislation, financial institutions with more than $500 billion in assets would be required to meet a new 15 percent capital requirement.