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Brown-Vitter Bill: A Capital Fix for Troubled Markets

While the backlash from Wall Street against stricter capital standards to reel in the "too big to fail" problem has begun, community banks are on board with a plan to address the issue once and for all. The Terminating Bailouts for Taxpayer Fairness Act, introduced by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., would implement higher capital levels to address one of the most egregious distortions of our free market system—the government guarantee against failure of our largest financial firms.

The fact that Congress is eyeballing the megabanks' capital should come as no surprise to Wall Street or anyone else. We all have vivid memories of those panicked days of 2008 and 2009, when the stock market crashed, unemployment began its rapid climb to double digits and interest rates dropped to nearly zero. Those days were reminiscent of the Great Depression in which the masters of the financial universe teetered on the brink of disaster because they didn't have the cash to pay their rapidly accumulating debts. Secret weekend meetings were held inside the great halls of the Treasury Department, Federal Reserve and U.S. Capitol to determine how policymakers could assure that we would still have an economy on Monday. To keep the financial system from complete collapse, taxpayers were left to bail out the money lenders.

While regulators now have greater authority to shut down these institutions, which are now required to have their living wills in place, these regimes are inherently reactive in that they provide guidance on what to do after the next disaster strikes. Meanwhile, the "too big to fail" problem is bigger than ever, with the 10 largest banks now holding assets equal to 71% of the gross domestic product, up from 58% in 2006.

To protect against future calamities, the Brown-Vitter bill would set capital standards that vary depending on the size and complexity of the financial institution. The bigger the bank, the greater its risk to the financial system, and the higher its capital rate would be. This would reduce the likelihood that megabanks would reach the brink of failing and that the financial system would go bust. Community banks under $50 billion in assets already have strong capital ratios that are appropriate to their business model and are therefore exempted from higher capital requirements.

The other half of the bill—which would provide targeted regulatory relief to community banks—is equally important to our nation's financial and economic well-being. While the megabanks have enjoyed their "too big to fail" protections against downside risk and Justice Department prosecution, the oft-forgotten sector of the banking industry has paid the price.

The high-risk behavior of our largest financial institutions typically leads to stricter government regulation across the banking industry. And while the megabanks can afford teams of lawyers to deal with the flow of red tape, smaller institutions struggle to keep up. Too often, when Wall Street sneezes, Main Street catches pneumonia . Sometimes it's fatal.

This phenomenon of megabank behavior resulting in more regulation is not new, and some have even suggested that it is just another questionable megabank business practice. After all, Wall Street executives and their lobbyists don't want higher capital ratios, because a safer bank results in less leverage, lower return on equity and, yes, lower bonus payouts.

But it is nonetheless destructive to local economies as community banks are forced to direct their resources toward regulatory mandates instead of small-business growth and community development. While policymakers have made progress in distinguishing Main Street community banks from Wall Street megabanks, we are still a long way from truly tiered regulations. The common-sense steps taken in the Brown-Vitter bill, from expanding qualified mortgage protections to eliminating annual privacy notice redundancies, are a good start.

Employing stricter capital guidelines on the largest and riskiest financial firms while easing the regulatory burdens they have caused for the rest of us would work together to remove excessive government distortions in our nation's financial sector. Despite the inevitable kicking and screaming from Wall Street, these reforms are essential to freeing up our markets and putting the "capital" back in capitalism.

John H. Buhrmaster is president of 1st National Bank of Scotia in Scotia, N.Y., and chairman-elect of the Independent Community Bankers of America.


(6) Comments



Comments (6)
They aren't secret now...after a freedom of information act request and a year+ of waiting. Two tiered regulation; one for hug, highly complex institutions and one for smile institutions is all we need. It is a simple solution to a simple problem that thousands of lobbyists are trying to make look more complex than it is.
Posted by grsb | Thursday, May 16 2013 at 3:46PM ET
There were no "secret loans." The law does not allow "secret loans". Do we need regulations that are tailored, not only to size, but to charter, business model, and many other factors that allow a diverse banking industry to meet the needs of the most diverse economy in the world? Absolutely. Let's work together on that. Or not, and just let the nonbank providers leave the banking industry behind. I think that the banking industry is a better option, so let's all work together to remind policymakers of the value of banking to the economy and our customers and get the policy changes that help make it so.
Posted by WayneAbernathy | Thursday, May 16 2013 at 2:54PM ET
Indeed two mid tier banks did fail, but the largest of the large were propped up, not only through TARP but through hundreds of billions in secret loans that were not available to industry at large.

There is no longer one industry. There is one where transactions, profit regardless of risk and greed reign supreme. And there is a second one where common sense, relationships and community responsibility are the guiding forces. The first is faceless and gigantic, the second has a name and a face and knows their customers.

As such, there must be one set of regulations designed for the size and complexity of the mega banks. And a separate set of regulations to govern the simple community banking business model of taking local deposits and making local loans.

B/V is only a distraction if you are so big that you will now be required to backstop your own risk taking. For the other nearly 7,000 financial institutions in the country that are making small business loans and providing good jobs, B/V is welcome medicine for the unfair, anti-trust-like advantage the Wall Street Mega's enjoy today using taxpayer money.
Posted by grsb | Thursday, May 16 2013 at 2:07PM ET
Actually, there were two very large banks that failed, and they were resolved in an expedited manner with little to no cost to the FDIC. If the taking of TARP money means that a bank "failed", I would note that such an assertion would be wrong and also point out that hundreds of banks of all sizes received TARP money, and moreover, nearly every bank paid it back with significant profit to the U.S. Government. My point about industry unity is that we NEED industry unity, and B-V is a distraction in that effort. As we saw with Dodd-Frank, industry disunity imposes a very heavy penalty on the industry, on all elements of the industry. Another major legislative bank surgery inviting a new wave of heavy bank regulation and more government dictation of them market place will have similar negative results for the entire industry. Instead, let's focus as a united industry on regulatory and legislative changes that will actually make things better.
Posted by WayneAbernathy | Thursday, May 16 2013 at 12:42PM ET
BRAVO! John.

You know how this works, and thank you for bringing Main Street's voice to BankThink. Brown/Vitter would effectively do two things that Dodd/Frank did not. First, it would require Wall Street Mega-monolithe firms to casino gamble with their own cash, rather than taxpayers. Second, it would finally take a step toward two tiered regulation.

Mr. Abernathy is completely missing the point of Brown/Vitter. Nobody said anything about community bank failures. What he fails to mention, however, is that nearly every mega bank did in fact "FAIL". the taxpayers picked up the tab. Brown Vitter, had it been in place would have prevented that. Is it really too much to ask the kings of wall street to back their own risk taking? Community banks have been doing it all along and have been held accountable to doing so, while Wall Street has had a pass.

We live and operate in a free market, so lets put the free back in it. Let institutions survive and fail on their own, like the community banking industry has always done!

And, Mr. Abernathy clearly misses the mark that the industry is no longer united. there was a bright line established in Dodd/Frank and a first hint at a two tiered regulatory system. Brown/Vitter takes the next step. Failing to see that is just intentionally ignoring factual evidence, or drinking the kook-aid; i'm not sure which.
Posted by grsb | Thursday, May 16 2013 at 12:30PM ET
There is and has been enormous, long-term, destructive pressure on community banking. It has resulted in the loss of nearly one community banking franchise per business day over the last several years. The core of the B-V bill does nothing, nothing, to address that problem. Reducing the viability of one segment of the banking industry will do little to enhance the success of the other. There may be emotional satisfaction, a certain schadenfreude, in crippling large banks, but it is naive at best to think that more major legislative surgery on the banking industry, legislation designed to shrink the banking industry overall--which the bill would do--will leave community banks unscathed. The economy is at last showing some signs of sustainable economic growth. What will help community banks and all banks is a united industry able to join in that growth even more robustly, efforts focused on specific regulatory and legislative changes that will enhance the ability of the banking industry to serve financial customers, not more measures to cede more of the financial business to the nonbank world.
Posted by WayneAbernathy | Thursday, May 16 2013 at 10:27AM ET
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