New push to rein in risks of lenders 'too big to fail'
Regulators and lawmakers say Dodd-Frank Act didn't live up to goal of curbing bank growth
Top US bank regulators and lawmakers are pushing for action to limit the risk that the government again winds up financing the rescue of one or more of the nation's biggest financial institutions.
Officials leading the debate, including Federal Reserve governor Daniel Tarullo, Dallas Fed president Richard Fisher and Senator Sherrod Brown, share the view that the 2010 Dodd-Frank Act failed to curb the growth of large banks after promising in its preamble to "end too big to fail".
Strategies under consideration range from legislation that would cap the size of big banks or make them raise more capital, to regulatory actions to discourage mergers or require that financial firms hold specified levels of long-term debt to convert into equity in a failure.
The push for revisiting the law or writing new rules "is absolutely driven by a sense that Dodd-Frank did not end too big to fail", said Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington.
Three of the four biggest US banks - JPMorgan Chase, Bank of America and Wells Fargo - are bigger today than they were in 2007, heightening the risk of economic damage if one gets into trouble. JPMorgan's 2012 trading loss of more than US$6.2 billion from a bet on credit derivatives raised questions anew about whether the largest institutions have grown too complex for oversight. That loss is among events that "have proven 'too big to fail' banks are also too big to manage and too big to regulate", Brown said. "The question is no longer about whether these megabanks should be restructured, but how we should do it."
Brown and fellow banking committee member David Vitter are considering legislation that would impose capital levels on the largest banks higher than those agreed to by the Basel Committee on Banking Supervision and the Financial Stability Board, which set global standards. Brown also plans to reintroduce a bill he failed to get included in Dodd-Frank or passed in the last Congress that would cap bank size and limit non-deposit liabilities.
The two senators have asked the Government Accountability Office to look into the economic benefits, including lower borrowing costs that banks with more than US$500 billion in assets receive as a result of federal deposit insurance, access to the Fed's discount window and investor perceptions that they'll be rescued in times of trouble.
Momentum for revisiting Dodd-Frank, whose authors Senator Christopher Dodd and Representative Barney Frank are no longer in Congress, is driven by both parties. Still, lawmakers are nowhere near consensus on what approach to take - whether raising capital standards, limiting the size of institutions or curbing subsidies.
The push by regulators might encourage Congress to take another look at the law, said Camden Fine, chief executive officer of Independent Community Bankers of America, which represents about 5,000 small lenders.
"I think there's going to be a synergy here between the regulators and Congress," Fine said. "If regulators call for new authority, Congress will look for that. I would say that between now and probably the end of 2015 or 2016 you're going to see some significant step by both Congress and regulatory agencies to rein in the big banks."
Fisher, who keeps a breeding bull named Too Big to Fail on his Texas ranch, proposed that regulators be explicit about what kinds of banking the government would backstop. Deposit insurance and discount-window loans would be available only to a firm's commercial and consumer-banking operations. Fisher's proposal would push other risk-taking businesses, such as investment banking, away from government support, raising their cost of funding.
House Financial Services chairman Jeb Hensarling said his panel would look at alternatives to the so-called liquidation authority in Dodd-Frank, which gives the Federal Deposit Insurance Corporation power to take over failing financial groups. He and fellow Republicans on the committee have argued that the plan keeps taxpayers on the hook for bailing out large banks because it lets the FDIC borrow from the Treasury to buy a failing bank's assets and pay off its creditors. "There is something fundamentally wrong in our nation if there are financial institutions that are deemed too big to fail and others too small to matter," Hensarling said.