In the last twelve months, one could easily get whiplash trying to keep up with the examples of bad risk management and extreme arrogance by many managers at the large, interconnected banks. These egregious scandals have frustrated Americans learning to live in the post-crisis world of anemic U.S. economic growth and a mostly recessionary Eurozone. The fact that no high level executive from the banks has even been indicted, much less gone to jail, for Wall Street’s role in worsening the standard of living of millions of Americans, has also understandably angered people and fueled the fire behind “too big to fail”.
In this environment, it is easy to see how some may be very pleased with Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., who recently unveiled their Terminating Bailouts for Taxpayer Fairness Act, a bill that focuses principally on requirements for big banks.
If no other bank reform frameworks or laws already existed, the Brown-Vitter bill might look like a good start. Given that two-thirds of Dodd-Frank rules, such as the Volcker rule, have yet to be finalized and that the Basel III minimum international capital standards are far from even being fully proposed in the U.S., the Brown-Vitter bill adds more regulatory uncertainty and confusion to a financial sector that desperately needs clarity and direction.
Dodd-Frank’s Title I, “Financial Stability — Systemic Risk Regulation and Oversight”, empowers bank regulators to require banks and nonbanks over $50 billion in assets to have the necessary capital and liquidity so that they do not collapse and cause systemic risk. Specifically, Section 165 of the Dodd-Frank Act requires the Federal Reserve to issue enhanced prudential standards for: U.S. bank holding companies with $50 billion or more in total consolidated assets; foreign banking organizations with $50 billion or more in global total consolidated assets; and U.S. and foreign nonbank financial components that have been designated as systemically important by the Financial Stability Oversight Council
The enhanced prudential standards include: heightened capital standards, liquidity standards, single counterparty credit limits, risk management requirements, stress testing requirements and early remediation framework.
It is regulators who have chosen to take guidance from the Basel frameworks, originated in the early 1970s as more countries realized how interconnected their banking systems were becoming. Basel is international guidance. This means our regulators can choose to impose whatever requirements are necessary given the nature of our banking system and current economic conditions.
The main reason Brown and Vitter introduced their bill is that they feel Dodd-Frank has enshrined the practice of bailing out banks. Both Title I and Title II are predicated on the belief that taxpayers should be protected and should not ever bail out banks again. Title I requires big banks to write living wills where banks must explain the identification process for its domestic and international funding, liquidity needs, interconnections and interdependencies and management information systems. Dodd-Frank very specifically through Title II, “the Orderly Liquidation Authority”, prohibits the bailing out of banks by taxpayers.
Principally, the Brown-Vitter bill calls for large banks to use higher quality capital. This is an excellent idea since, unfortunately, it took the financial crisis for many to finally see that tax-deferred assets and hybrid capital have no loss absorbency value in a time of stress. Yet, higher quality capital requirements are already a key part of Basel III’s Pillar I and a great improvement in comparison to what was acceptable under Basel II. U.S. banks, fortunately, are in a much better position to raise equity or deleverage in order to have loss absorbent capital.
The number of corporations owning the majority of U.S. media outlets went from 50 to 5 in less than twenty years.
Senators Brown and Vitter are now allied with the governors, attorneys general and chief justices of the 50 states, as well as US exporters and taxpayers, who know what is at stake: our democracy and our credit rating. Will they hold the U.S. Secret Service accountable after the Secret Service prevented the 187 other countries that belong to the Bretton Woods institutions from settling litigation to bring the World Bank into compliance on the capital markets? Think Enron at the World Bank. http://www.ntu.org/governmentbytes/government-reform/whistleblower-protections-a1220.html
The Durbin Amendment was passed hastily without any real pro/con data on how it was going to truly impact the industry and the public, and look what happened.
Indeed, the Basel framework was never intended for small banks. Since its genesis in the early 1970s, the focus was always large, interconnected international banks. www.MRVAssociates.com
I'm not sure "the Brown-Vitter bill calls for large banks to use higher quality capital." At this point, it seems to me it simply requires more capital.
You say, "It is not the job of legislators to decide how much capital banks should have; that is the job of bank regulators." Who made that decision? Personally, I don't have that much faith in regulators.
You say, "U.S. banks would be at a competitive disadvantage vis-a-vis European banks." Well, big bank executives and traders might earn less money because they would have to take on less debt trading derivatives and such. That doesn't bother me. Banks could still do traditional banking. That's what I care about.
Consultants, lawyers, and traders will earn big bucks claiming they understand the forthcoming Dodd-Frank and Basel III regulations, which will be horribly complex. You have great faith in this approach. Myself, I believe greater simplicity will be more effective.