April 25, 2013
Public Citizen Lauds Brown-Vitter Mega-Bank Safety and Stability Initiative
WASHINGTON, D.C. – A proposal introduced by U.S. Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) is a bold effort to tackle the problem of too-big-to-fail banks and would boost the stability of the banking system if enacted, Public Citizen said today.
The “Terminating Bailouts for Taxpayer Fairness Act of 2013,’’ introduced Wednesday, requires the six American banks with more than $500 billion in assets to maintain 15 percent shareholder equity capital, and banks with $50-$500 billion to maintain 8 percent capital. It also restricts bank loans to their affiliates and bars banks from ignoring capital requirements for netted derivatives.
“The Brown-Vitter effort embodies rarely seen bipartisan support for a practical change. Members of Congress from progressive and conservative persuasions agree that more equity capital is essential to a sound financial sector,” said Lisa Gilbert, director of Public Citizen’s Congress Watch division. “The Brown-Vitter capital rule constitutes an elegant addition to the Dodd-Frank Wall Street Reform Act, which was designed to ensure that American taxpayers won’t be required to bail out a bank that’s too big to fail.”
Added Bartlett Naylor, financial policy advocate for Public Citizen’s Congress Watch division, “In this proposal, Senators Vitter and Brown advance important new prudential tools to forestall taxpayer bailouts of large banks. Requiring America’s six mega-banks to replace about 10 percent of their borrowed money with shareholder money would dramatically improve bank safety and stability.”
Large banks typically use about 5 percent shareholder money in making loans, with the other 95 percent coming from depositors, bond holders and short-term lenders. To put this practice in perspective, it’s equivalent to a home buyer putting in a 5 percent down payment and borrowing the rest, Naylor said. “The Brown-Vitter bill requires a 15 percent ‘down payment’ by banks, increasing their own ‘skin in the game’ and lowering their leverage,” explained Naylor.
The bill also prevents the mega-banks from hiding assets through so-called risk-weighting, which is susceptible to gaming by banks to decrease the perceived riskiness of their asset bases, without decreasing the actual riskiness of their asset bases.
Additionally, the bill distinguishes between those institutions whose failures are more likely to create systemic repercussions. To that end, medium-sized regional banks are required to deploy 8 percent shareholder equity in their operations. And community banks, which were victims, not perpetrators of the Wall Street-induced crash, are exempted from increased capital requirements.
“Importantly, the bill’s requirement for capital behind its full gambling book of derivatives bets also would help bring sanity to this exploding and dangerous arena, now $700 trillion large,” said Micah Hauptman, financial policy counsel for Public Citizen’s Congress Watch division. “Currently, banks can discount for offsetting bets, ignoring the possibility that some betting partners (counterparties) may renege on the bets.”
While Public Citizen opposes certain extraneous anti-consumer elements of the Brown-Vitter bill and encourages the senators to remove them, the organization applauds Brown and Vitter for their bold efforts to tackle the too-big-to-fail problem.