Mervyn King Too Big To Fail
Over the past few weeks, there’s been a lot of talk — and much ink spilled — about solving the problem of banks that are “too big to fail.” Sen. Sherrod Brown (D-Ohio) and I, along with Sens. Bob Casey (D-Pa.), Jeff Merkley (D-Ore.), Sheldon Whitehouse (D-R.I.), Tom Harkin (D-Iowa) and Roland Burris (D-Ill.), introduced a bill to place strict limits on the size and leverage used by systemically significant banks and nonbanks alike.
The current financial regulatory bill is a good bill and has many provisions that I support. Indeed, the Brown-Kaufman amendment is a complementary piece of legislation, not a substitute. But as Moody’s reports, “the proposed regulatory framework doesn’t appear to be significantly different from what exists today.” And such measures won’t go nearly far enough to protect the economy — even as millions of Americans are still suffering from unemployment and home foreclosures.
The Brown-Kaufman amendment is not as dramatic as it seems. Very large banks will still exist under this bill. But they won’t be so big that they are “too big to manage and too big to regulate,” as former Federal Deposit Insurance Corp. Chairman Bill Isaac has said. And the leverage those banks use — the ratio of capital to assets — which is the very basis for how risky they become, will be statutorily capped at 6 percent, twice as conservative as current law.
The bill would also cap at 10 percent a bank holding company’s share of the nation’s total amount of deposits, and it would limit nondeposit liabilities of a bank holding company to 2 percent of gross domestic product and nondeposit liabilities of a nonbank financial institution to 3 percent of GDP.
In fact, the extra layer of protection provided by this legislation is the least we should do. The federal government cannot continue to subsidize these megabanks and permit them to grow by taking on ever-greater risk and speculation. Dean Baker and Travis McArthur of the Center for Economic and Policy Research compared the borrowing costs of the 18 largest banks (all of which have more than $100 billion in assets) to smaller ones. They estimated that the effective government subsidy — because of the implicit guarantee that they are “too big to fail” — results in a 70-to-80-basis-point advantage over smaller banks, resulting in lower borrowing costs equal to approximately $34 billion. Read More ....
The current financial regulatory bill is a good bill and has many provisions that I support. Indeed, the Brown-Kaufman amendment is a complementary piece of legislation, not a substitute. But as Moody’s reports, “the proposed regulatory framework doesn’t appear to be significantly different from what exists today.” And such measures won’t go nearly far enough to protect the economy — even as millions of Americans are still suffering from unemployment and home foreclosures.
The Brown-Kaufman amendment is not as dramatic as it seems. Very large banks will still exist under this bill. But they won’t be so big that they are “too big to manage and too big to regulate,” as former Federal Deposit Insurance Corp. Chairman Bill Isaac has said. And the leverage those banks use — the ratio of capital to assets — which is the very basis for how risky they become, will be statutorily capped at 6 percent, twice as conservative as current law.
The bill would also cap at 10 percent a bank holding company’s share of the nation’s total amount of deposits, and it would limit nondeposit liabilities of a bank holding company to 2 percent of gross domestic product and nondeposit liabilities of a nonbank financial institution to 3 percent of GDP.
In fact, the extra layer of protection provided by this legislation is the least we should do. The federal government cannot continue to subsidize these megabanks and permit them to grow by taking on ever-greater risk and speculation. Dean Baker and Travis McArthur of the Center for Economic and Policy Research compared the borrowing costs of the 18 largest banks (all of which have more than $100 billion in assets) to smaller ones. They estimated that the effective government subsidy — because of the implicit guarantee that they are “too big to fail” — results in a 70-to-80-basis-point advantage over smaller banks, resulting in lower borrowing costs equal to approximately $34 billion. Read More ....
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