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Sens. Sherrod Brown and David Vitter
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Brown, Vitter to Speak at 'Too Big to Fail' Forum

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The battle over "too big to fail" has continued to show surprising momentum nearly three years after the passage of the Dodd-Frank Act, a bill that was supposed to put an end to the debate.

Yet this year the debate has erupted anew, with one bill already introduced in the Senate to break up the banks and another expected shortly to raise their capital standards from the unlikely bipartisan team of Sen. Sherrod Brown, D-Ohio, and Sen. David Vitter, R-La.

Fueled by comments from Attorney General Eric Holder and a series of mistakes from the largest banks, a growing coalition of voices are advocating a breakup of the biggest institutions. Yet as Barbara Rehm, American Banker's editor-at-large, has pointed out, there are significant questions remaining about how this could be done and what its impact would be.

It also remains unclear whether the momentum is sufficient to pass legislation.

"There are always a lot of issues on the Washington launch pad, the question is what ignites the engine," said Karen Shaw Petrou, the managing director of Federal Financial Analytics. "I think 'too big to fail' is on the pad and it's fueled - what I don't know is whether there is a spark."

To shed more light on the subject, American Banker has teamed up with Federal Financial Analytics, a leading policy analysis firm, to convene a forum dedicated to whether "too big to fail" still exists and, if so, what to do about it. On April 23, we'll hear directly from Sens. Brown and Vitter in back-to-back speeches, followed by an analysis provided by Petrou, on its potential impact. (Here's a glimpse of her take on the pro and cons of an early draft Vitter-Brown bill.)

Then experts on all sides of the debate will discuss what impact the Brown-Vitter legislation will have on the banking industry.

"We want a constructive debate that focuses not just on the rhetoric but rather on the detailed rationale, particularly with regard to the consequences of action," said Petrou. "It's easy enough to agree that no bank should be 'too big to fail.' Everyone, including the very biggest banks, agrees on that. The real issue, which I hope this forum develops, is now what? Is there a policy response needed to achieve this universally shared goal?"

The forum will be held at the National Press Club, but is by invite-only. It will be live-tweeted by American Banker reporter Donna Borak at @donnaborak on Tuesday morning, followed by reporting and analysis on the roundtable.

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Comments (2)
If we want badly needed financial reform, then regulators have to make some very tough decisions. We know that regulations have grown too much and many are ineffective. Most banks will become even less able to deal with the complexity now that most provisions of Dodd-Frank have been implemented. The cost and time burden has grown astronomically and result in a ratio of costs to equity a much higher burden for community banks. It does not appear to be enough emphasis placed on this fact by regulators.

Regulators are hanging their hat on risk models and stress-testing by the banks to ensure banks are not headed for trouble. Unfortunately stress-testing and models being used have never been back-tested and provide a false sense of security. One example to highlight the point is shown by Basel II capital standard being entirely ineffective in protecting banks from serious hardship during the most recent financial crisis.

Models are not shared with the industry, nor are they shared with other bank regulatory agencies. They remain a secret black box. Examination ratings remain a secret as well to all but the subject bank.

A number of empirical studies show that leverage capital to assets is the best predictor to determine whether bank will hold up during a major crisis. Also, the larger the leverage capital, the better secured is the bank which should translate to better examination ratings, and lower FDIC deposit insurance assessments.

While regulations are growing in leaps and bounds, the financial industry, which includes banks and shadow banks is outpacing regulations quite handily. Regulators, as a result, become less effective over time because they cannot keep pace with a more rapidly changing industry.

Since regulations and regulators become less effective, the only way to prevent TBTF and bank failures is to increase the capital of all banks. Due to the heightened complexity of the large banks and the additional resources (regulatory examinations, monitoring and FDIC insurance protection) large banks should be required to have higher leverage capital ratios on a graduated scale based on asset size. The higher capital, if appropriately high enough, should exert pressure for the large banks to shrink to a more reasonable size.
Posted by Dwihas3 | Wednesday, April 17 2013 at 10:22PM ET
"Fueled by comments from Attorney General Eric Holder and a series of mistakes from the largest banks, a growing coalition of voices is advocating a breakup of the biggest institutions."
No truer words spoken.
It seems the largest banks are choosing to be lead quietly to the slaughter.
A question of how to dismember the banks is an interesting one. On the surface, Volker would seem the likely candidate. But what if there were a critical flaw within. A flaw of sufficient scope for banks to mount a credible challenge.
How is our nation better served? My adult children are unable to find jobs, as are many children. Most senior bankers are so disheartened and discouraged they would not recommend the industry to any new college students. Also, banking is the last great, labor intensive industry in America. If we get this wrong, unemployment skyrockets.
Breaking up the largest banks is disastrous. As an economist I know this and can prove this. The only conceivable reason would be as a result of inexcusable irresponsibility. As cited above, we have that may be there now.
I am an economist, a consultant, and a father. How can I preserve my industry, protect my children, and yours? Do I write a step by step idiot guide; "How central banks fracture big banks"? Or do I try one last time to round up the big banks. If the top ten banks are close to 70% of all banking activity in America, why do they have so little clout? Perhaps it is time for those banks to take a hard look in the mirror and grow up.
Kennedy said; "ask not what your country can do for you but what you can do for your country". So how can I serve the greater good of America? Were I to attend the conference next week, I wonder what I would bring.
Dialog and comments are welcome
Timothy Alexander
Managing Director
Triune
tim@triunegfs.com
www.triunegfs.com
805/402-4943 M
Posted by Heytimbo | Thursday, April 18 2013 at 4:15PM ET
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