The largest U.S. banks, including JPMorgan Chase & Co. and Bank of America Corp., would have to hold capital in excess of Basel III standards under a proposal being drafted by Senate Democrats and Republicans to curb the size of too-big-to-fail banks.
The current draft of the legislation would require U.S. regulators to replace Basel III requirements with a higher capital standard: 10 percent for all banks and an additional surcharge of 5 percent for institutions with more than $400 billion in assets. Senators Sherrod Brown, a Democrat from Ohio, and David Vitter, a Republican from Louisiana, have said they intend to introduce the bill this month.
The measure comes amid calls by regulators including Federal Reserve chairman Ben S. Bernanke to do more to rein in the size of so-called too-big-to-fail banks, a term used to describe institutions perceived to be so big and important that taxpayers would be compelled to prevent their failure. The proposal’s authors have said it incorporates ideas from FDIC Vice Chairman Thomas Hoenig, Dallas Federal Reserve President Richard Fisher and former FDIC Chairman Sheila Bair.
Analysts including Jaret Seiberg of Guggenheim Securities LLC’s Washington Research Group said that the bill doesn’t yet have enough support to become law. Still, its bipartisan support means it has a better chance of passage than other proposals.
“I don’t think this language can be enacted into law but that doesn’t mean if you are at a big bank you should breathe easy,” Seiberg wrote in a market commentary. “This is indicative of a big and serious threat.”
The measure would impose the strictest provisions on six banks -- JPMorgan Chase, Bank of America, Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc., and Morgan Stanley -- all of which have assets greater than $400 billion.
Karen Shaw Petrou, co-founder of Federal Financial Analytics Inc., a Washington-based consulting firm, said the proposal would return the banking system to a time before the Federal Deposit Insurance Corp. was set up to guarantee bank deposits.
“I view it as a radical view of how American banks should be restructured that seems to disregard the role of the FDIC coverage, prudential regulation and the totally different structure of the 2013 economy,” Petrou said in an interview.
Brown has said the goal of the legislation is to take away the “economic advantage the market gives” large banks and to reduce the risk they pose to the 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.”
Under Basel III, banks must hold at least 7 percent of Tier 1 capital against a bank’s risk-weighted assets, plus as much as a 2.5 percent surcharge for some of the world’s largest and most complex banks.
“A Wall Street lobbyist stole and distributed a copy of our draft bill to try and drum up support for protecting the big banks’ taxpayer-funded handouts -- and ultimately remain too-big-to-fail,” Luke Bolar, a spokesman for Vitter, said when asked to comment on the draft bill.
Large bank lobbying groups have fought criticism that some banks remain too-big-to-fail. They 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 reported draft mandates excessively high capital that will restrict banks’ ability to lend to businesses and job creators, and hurt economic growth,” Rob Nichols, president and chief executive of the Financial Services Forum, said in an e-mail.
The draft bill is subject to change before its introduction. It would have to be adopted by both chambers of Congress and be signed by President Barack Obama before it would become law.
The legislation would require banks to rely more on tangible common equity and less on risk-weighted assets. The bill would require the Federal Reserve and Comptroller of the Currency to write regulations setting capital standards for subsidiaries with at least $50 billion in consolidated assets. It would impose limits on federal bailouts for non-bank subsidiaries, including for U.S. branches of a foreign bank.