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After more delays and partisan fighting late Thursday over whether and how to proceed on financial reform, the Senate rejected 61 to 33 a populist amendment that would have forced the break up of the nation's biggest banks.
May 6
WASHINGTON — A liberal Democrat on the Senate Banking Committee reintroduced legislation Wednesday to force a significant downsizing at the nation's largest banks, on the same day two well-known critics of "too-big-to-fail" policies were scheduled to testify on the subject.
While the bill's chances are highly questionable, the specifics of Sen. Sherrod Brown's proposal — including stronger caps on liabilities — may alarm big-bank executives.
The legislation is titled the Safe, Accountable, Fair, and Efficient Banking Act. A similar proposal by Brown had failed to get enough support when he introduced it as an amendment to the 2010 Dodd-Frank Act.
The latest bill would aim to close loopholes in existing caps on an institution's allowable share of the nation's deposits and liabilities, limit non-deposit liabilities to 2% of gross domestic product for banks, and 3% for nonbanks; and set a formal 10% leverage limit for large bank holding companies and certain nonbank financial institutions.
"Making Wall Street banks smaller and simpler will benefit taxpayers by preventing future bailouts," Brown, D-Ohio, said at a hearing on limiting federal support for big banks before the Senate Banking subcommittee that he chairs. "It will improve pricing and service, as outsized market power reduces competition and inflates prices for clients and consumers."
Among the witnesses at Wednesday's hearing were two high-profile advocates of breaking up big banks: former Federal Reserve Board Chairman Paul Volcker and Thomas Hoenig, now a board member at the Federal Deposit Insurance Corp. and former head of the Federal Reserve Bank of Kansas City.
In prepared testimony, Volcker said while it was hard to oppose the aid institutions received during the crisis — given fears of a system-wide collapse — the bailout left "real consequences, behavioral consequences."
"The expectation that taxpayers will help absorb potential losses can only reassure creditors that risks will be minimized and help induce risk-taking on the assumption that losses will be socialized, with the potential gains all private," Volcker said. "Understandably the body politic feels aggrieved and wants serious reforms."
Volcker said the U.S. took an "important step" in passing Dodd-Frank. Specifically, he lauded provisions such as the cap Congress imposed on the size of banks. (No institution can hold more than 10% of the nation's liabilities.) He said the section of the law he himself proposed — known as the Volcker Rule — banning banks' proprietary trading addresses "risk, conflicts of interest, potentially compensation practices and, more broadly, the culture of banking institutions."
Yet he added that the "effectiveness" of the law's biggest pieces relies on the rule-writing process, and some key areas of the financial system needing reform have not been addressed. Those include reforming the nation's system of housing finance, improving coordination between different domestic regulatory regimes and changes to money-market mutual funds.
"The residential mortgage market today remains almost completely dependent on government support," he said. "It will be a matter of years before a healthy, privately supported market can be developed. But it is important that planning proceed now on the assumption that government-sponsored enterprises will no longer be a part of the structure of the market."
Meanwhile, Volcker said money-market funds are "truly hidden in the shadows of banking markets."
"Money market mutual funds are another example of moral hazard, and seem to me more amenable to structural change," he said.
But despite growing calls for structural changes at large institutions, and the specifics of Brown's bill, analysts remain skeptical such legislation could be enacted.
Jaret Seiberg, a senior policy analyst for Guggenheim Securities' Washington Research Group, said while the "headline risk" of Wednesday's hearing could be high, the "real risk" of proposals to reduce the size of the big banks was low.
"We believe there is a 20% risk that Congress and the regulators in the next few years will move to reduce the size of the biggest banks by either breaking them up or raising capital requirements even higher," Seiberg wrote in a research note Wednesday. "While this risk is low, it is much higher than market expectations as we believe most investors see little threat here."
