Brown-Vitter Bill Could Force Banks to Shrink, S&P Says

U.S. banks could be forced to break up or shed assets because of a push by federal lawmakers to raise capital requirements at the largest firms, Standard & Poor’s said.

Senator Sherrod Brown, an Ohio Democrat, and Republican David Vitter of Louisiana unveiled legislation this week that would mandate a 15 percent capital cushion for banks with more than $500 billion in assets. Meeting the requirements may force lenders to raise as much as $1.2 trillion in additional equity and would drive down returns, S&P said yesterday in a report.

“We do not see equity markets being able to meet the massive level of common equity the bill requires of the largest banks,” the analysts wrote in the report. “The largest banks would need to break up or deleverage.”

Supporters of the legislation said it would guard taxpayers against future bailouts and end “too-big-to-fail” firms as the Dodd-Frank Act fails to address the systemic threat posed by the largest banks. The measure faces obstacles to enactment, with Tim Johnson, chairman of the Senate Banking Committee and a South Dakota Democrat, saying regulators should finish work on Dodd-Frank before determining whether it solves too big to fail.

If the bill becomes law and some banks splinter, they would be at a disadvantage to international competitors, S&P said. Firms choosing to cut assets could cause a credit crisis, tipping the U.S. economy into a recession, the analysts wrote.

“Rating implications would likely be neutral to negative for those banks the bill affects,” S&P wrote.

The ratings firm said it would monitor lenders to determine whether they should still be considered systemically important, and that it may reduce the level of support factored into the ratings, according to the report.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE