Banking crusaders

US senators' reform plan for too-big-to-fail banks to protect taxpayers has won wide support because of its simplicity

PUBLISHED : Wednesday, 22 May, 2013, 12:00am
UPDATED : Wednesday, 22 May, 2013, 4:43am

An unlikely pair of senators are becoming the talk of Washington and Wall Street and sending ripples far and wide with their plan to protect taxpayers by demanding that banking giants make themselves safer.

If their proposals win congressional approval, the big banks would have to raise more than US$1 trillion in fresh capital, which might be a good brake against their reckless gambling and supersize salaries.

It is a measure of the consternation that Sherrod Brown, a Democrat, and David Vitter, a Republican, are causing that the big banksters are already up in arms against their plan.

On the other hand, important bank regulators have expressed their support for the proposals.

Some previously cynical commentators say the Brown-Vitter proposals actually change the battlefield for financial reform and could end the dangerous domination of too-big-to-fail banks.

But don't get carried away, warn the super cynics, because there are flaws in the scheme and the banksters have big bucks to use to kill it.

The two senators' proposals make a virtue out of simplicity, with no complex formulas, or regulatory body that might be captured, or pages of definitions and rules, like the 2010 Dodd-Frank Act, which started as 848 pages of law and has become 9,000 of rules and regulations, mostly waiting to be brought into force.

The two senators in April proposed a non-binding resolution calling for the end of implicit subsidies enjoyed by the banking giants. It was unanimously passed.

They have now introduced a bill, called "Terminating Bailouts for Taxpayer Fairness".

According to an International Monetary Fund working paper, big banks get an advantage of 80 basis points from the implicit government guarantee, which allows them to get credit more cheaply.

Bloomberg calculated that this amounted to a taxpayer subsidy of US$83 billion a year for the top 10 US banks by assets, and US$64 billion for the top five. The senators want the government accounting office to calculate the value of the subsidy more precisely.

Barry Ritholtz, a blogger who normally shows trademark cynicism, is impressed by the beauty of the resolution's simplicity. In his Washington Post column, he pointed out the five broad strokes of the senators' bill:

  • It mandates a flat 15 per cent capital requirement for any financial institution with more than US$500 billion in assets;
  • It does not rely on ratings agency grades;
  • It removes off-balance sheet assets and liabilities as separate classes, and treats them as if they are on the balance sheet;
  • It requires derivatives positions to be included in a bank's consolidated assets; and
  • Requires that the capital cushion that a bank holds be liquid.

"For those people who complained that Dodd-Frank was too complex, let's see how they like 'the new simplicity'," writes Ritholtz.

The bill's simplicity, in putting the big banks on one side and smaller banks on the other, has won the support of the Independent Community Bankers of America, with 5,000 member banks and more than US$2 trillion in assets. Their president, Bill Loving, said: "This legislation will reduce system risk, protect taxpayers and put our nation's community banks on a competitively balanced playing field."

Thomas Hoenig, a vice-chairman of the Federal Deposit Insurance Corp, also supports the bill.

Former IMF chief economist Simon Johnson praises the bill for trying to curb reckless behaviour by the banksters and offering "an appropriate roadmap for addressing some of the core problems and making the financial system significantly safer".

Across the Atlantic, Andy Haldane, the Bank of England's executive director for financial stability and one of the most respected bank regulators, was more careful in his support for the bill. He described it as "one of the most radical" proposals to date.

"From a simplicity and robustness perspective, it has attractions," Haldane said, but, "at the same time, the Brown-Vitter proposals clearly raise a host of practical questions."

Among these, the new capital requirements are "sufficiently far north of existing capital standards that they are perhaps best seen as a [possibly distant] long-term resting place, not a practical long-term objective", he said.

If the Brown-Vitter proposals survive, the big banks would have to raise more than US$1 trillion in fresh capital, far in excess of what is proposed under Basel III regulations, which are themselves being bitterly contested by the big banks, which say the new rules will drag down economic growth.