Critics of banks deemed “too-big-to-fail” gained political support in the waning hours before the U.S. Congress adjourned over the weekend when senators voted unanimously in favor of ending perks enjoyed by the largest banks.
Senators voted 99-0 in support of a non-binding measure calling for an end to implicit subsidies the credit markets give banks over $500 billion because of the perception that the federal government would bail them out.
“The measure was non-binding, but it was an important step forward,” Senator Elizabeth Warren, a Democrat from Massachusetts and a critic of large banks, said in a statement. “I’m glad that Republicans and Democrats can agree: ‘too-big-to-fail’ needs to end and these big-bank subsidies make no sense.”
The amendment, sponsored by Senators David Vitter, a Republican from Louisiana, and Sherrod Brown, a Democrat from Ohio, is seen as an early gauge of support for a bill the two lawmakers said they will introduce next month to provide economic incentives for banks to reduce their size.
Brown said the goal of the legislation is to take way the “economic advantage the market gives” large banks and to reduce the risk they pose to the entire financial system. He said support for a too-big-to-fail bill has grown over the last 10 to 12 months.
“I’m confident that support is growing,” Brown said in a March 10 interview with Bloomberg Television. “I don’t know that we’ve got the 50 or maybe 60 votes we need yet.”
The upcoming bill would impose additional capital requirements on the largest banks -- defined in the amendment as those with more than $500 billion in assets. The new capital rules would not include risk weights that “can be manipulated and gamed,” Vitter said in remarks on the Senate floor on Feb. 28.
Six U.S. banks have more than $500 billion in assets, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley.
The amendments come as more public officials have said they believe the 2010 Dodd-Frank Act didn’t do enough to end the perception that the government would step in to rescue large banks. Federal Reserve Governor Daniel Tarullo and Dallas Fed President Richard Fisher are among the most prominent supporters of taking additional measures to curb bank size. The Brown-Vitter bill also incorporates ideas from Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig and former FDIC Chairman Sheila Bair. The bill would require banks to rely more on tangible equity for capital and less on risk weighted assets.
“This is a really impressive sign that we mean business on ending too-big-to-fail,” Vitter said in a release following the amendment’s passage. “Mega-banks are still receiving special handouts that create an uneven playing field -- making it harder for our community banks and credit unions to compete.”
Debate over an implicit subsidy for big banks was sparked in part by a Bloomberg View editorial that calculated that big banks save as much as $83 billion in borrowing costs because of the market perception that they would be bailed out by the government if they fell into financial distress.
Brian Gardner, senior vice president for Washington research at Keefe, Bruyette & Woods Inc., expressed skepticism that the Senate’s vote on a non-binding resolution would translate into legislative action.
“Being against too-big-to-fail is like being for motherhood, apple pie and baseball,” Gardner said. “Nobody could possibly vote against that amendment because you’d be seen as in favor of the big banks.”
Jaret Seiberg, senior policy analyst at Washington Research Group, a unit of Guggenheim Securities LLC, estimated the chances of a bill similar to the Brown-Vitter amendment passing Congress at one in three.
“We do not see a specific path forward for this amendment, but will be watching to see if it gets added to regulatory reform legislation that might emerge this spring,” Seiberg said.
Large bank lobbying groups issued a brief on March 11 arguing that the Dodd-Frank Act, passed by Congress in response to the 2008 credit crisis, greatly diminished whatever advantage the biggest lenders held over smaller rivals.
“The financial services industry is strongly of the view that no institution should be too-big-to-fail, and that taxpayer money should never be used to rescue financial firms from their mistakes,” said Rob Nichols, president and chief executive officer of the Financial Services Forum. “Government policy should be to close down failing institutions, regardless of size, and prosecute individuals who break the law.”
Karen Shaw Petrou, co-founder of Federal Financial Analytics Inc., said these moves illustrate the public’s growing sentiment against the largest banks, whose response has been sluggish.
“It’s a wake-up call,” Petrou said. “I have a seen a lot of things happen regardless of the most nominally sophisticated lobbying. They need to be more than scared.”
Joseph Engelhard, a former Treasury official who is now senior vice president at Capital Alpha Partners LLC, an investment advisory firm, said the most likely impact will be on regulations, including on the Fed’s capital buffer for systemic institutions and living wills.
“These amendments passing incrementally add to the political pressure that regulators are already very cognizant of as they finalize the rules,” Engelhard said.