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Too-big-to-fail bill pitched as fix for Dodd-Frank Act’s flaws

Banks almost $2 trillion larger than before crisis

By Cheyenne Hopkins

April 24, 2013 • Reprints

“Too-big-to-fail” legislation unveiled yesterday in Washington is needed to rein in the biggest U.S. banks because the Dodd-Frank Act has failed to guard taxpayers against future bailouts, the bill’s sponsors said.

The four largest banks -- JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co -- “are nearly $2 trillion larger than they were” before getting U.S. aid to help them weather the 2008 credit crisis, Senator Sherrod Brown said in a news conference.

“If big banks want to continue risky practices, they should do so with their own assets,” said Brown, an Ohio Democrat. “Our bill will ensure a level playing field for all financial institutions by ending the subsidy for Wall Street megabanks and requiring banks to have adequate capital.”

Brown and Republican Senator David Vitter of Louisiana, whose plan is opposed by key lawmakers, are proposing a 15 percent capital requirement for so-called megabanks as a way to reduce risk and remove the perception that they would get bailouts in a crisis. Mid-size and regional banks, those between $500 billion and $50 billion in assets, would need to have 8 percent capital relative to assets.

“It is our intent to have much more protection against a crisis and against a taxpayer bailout in a crisis, and it is our intent to level the playing field and take away a government policy subsidy, if you will, that exists in the market now favoring size,” Vitter said during a roundtable meeting at the National Press Club on April 23.

Mid-size ‘Losers’

The $500 billion threshold effectively puts a cap on growth for regional banks such as PNC Financial Services Group Inc. and BB&T Corp., which would be “losers” under the bill, according to Joseph Engelhard, a former Treasury Department official who is now senior vice president at Capital Alpha Partners LLC., a Washington-based firm that “offers predictive insight for capital-markets professionals,” according to its website.

“To the extent this bill gets close to passage it will make the Fed and other regulators work even harder to implement Dodd-Frank in a tougher way,” Englehard said in an interview.

The Dodd-Frank financial-regulation law was enacted in 2010, two years after a credit crisis that led to the collapse of Lehman Brothers Holdings Inc. and taxpayer bailouts that helped sustain other leading financial firms. Implementation has been slowed amid disagreement within regulatory agencies and legal challenges to some rules.

Traditional Banking

At least six banks have assets exceeding the $500 billion threshold Vitter cited April 23 for the highest capital standard: JPMorgan, Citigroup, Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, as well as Charlotte, North Carolina-based Bank of America and San Francisco-based Wells Fargo.

Brown, 60, and Vitter, 51, say their bill would limit the government safety net of deposit insurance and discount lending to traditional banking operations and require affiliates and subsidiaries of large banks to be separately capitalized. It would provide regulatory relief to community banks including changes to a qualified mortgage rule, creating an independent bank examiner ombudsman for those institutions and adopting privacy notice simplification.

For Brown, who was elected to the Senate in 2006 after serving in the House, the proposal recalls his failed effort during debate over what became the Dodd-Frank Act to include an amendment to limit banks’ size. Vitter, who was elected in 2004 and joined Republicans in nearly unanimous opposition to Dodd- Frank, has criticized proposed Basel III capital standards as a “mess” and said they should be thrown out.

Chairman’s Opposition

Their legislation faces obstacles to enactment, starting in the Senate Banking Committee, where Chairman Tim Johnson, a South Dakota Democrat, has said regulators should finish work on Dodd-Frank before determining whether it solves too big to fail. Senator Mike Crapo, the Idaho lawmaker who is the panel’s top Republican, said in an interview that setting capital standards is a job for regulators, not legislators.

The Brown-Vitter bill is also opposed by Senator Carl Levin, the Michigan Democrat who excoriated banks for their pre- crisis risk-taking in his role as chairman of the Senate’s Permanent Subcommittee on Investigations.

“I want to have tough regulation, which is what I think Dodd-Frank stood for and explicitly says,” Levin said in an interview. “I’m fighting for that. I can’t at the same time give up on that and say ‘break up the banks.’”

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About the Author

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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Related Terms
US Federal Reserve 8527Congress 1894Texas 1372finance 1292Morgan Stanley 934Goldman Sachs Group Inc. 864Michigan 789Senate 610Citigroup Inc. 603Bank of America Corp. 596Bank of America 405Ohio 313Louisiana 283banks 275Department of the Treasury 274North Carolina 251JPMorgan 206Idaho 196Dodd-Frank 182law 163Lehman Brothers Holdings Inc. 158Senate Banking Committee 146House Financial Services Committee 90FDIC 87South Dakota 73Carl Levin 62Stanford University 39JPMorgan Chase & Co. Bank of America 32PNC Financial Services Group Inc. 28deposit insurance 28Permanent Subcommittee on Investigations 22Sherrod Brown 22Keefe 20American Bankers Association 18David Vitter 16Jeb Hensarling 15Tim Johnson 15Bailouts 14bankruptcy law 13too-big-to-fail 12Mike Crapo 11BB&T Corp. 10Bruyette & Woods Inc. 7financial-regulation law 4Joseph Engelhard 4Covington & Burling LLP 3Brian Gardner 3Wells Fargo & Co 2Capital Alpha Partners LLC. 1bank examiner ombudsman 1National Press Club 1Ed Yingling 1

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