WASHINGTON — The "odd couple" tandem of Sen. Sherrod Brown, D-Ohio, and Republican Sen. David Vitter, R-La., previewed their much-anticipated legislative effort to rein in the largest banks on Tuesday, hinting at some likely changes to the bill from an earlier version.
The two lawmakers opened a Washington forum — hosted by American Banker and Federal Financial Analytics — on congressional efforts to limit systemic dangers, one day before the senators are expected to officially unveil their bill.
The two Senate Banking Committee members, who otherwise come from different sides of the political spectrum, said their motivation for getting involved in the issue is simple: the Dodd-Frank Act did not do enough to prevent a financial giant from hurting the broader economy, and investors still believe that policymakers will use bailouts if a big firm gets in trouble.
"It's pretty clear that the market is saying that 'too big to fail' is still a problem — that these huge Wall Street banks are too complex, too interconnected, too large," said Brown.
Vitter noted several flash points since the crisis, including the "London Whale" trading debacle at JPMorgan Chase, illustrate the need for more industry requirements.
"There were a whole lot of smart people in that room at the bank … [and] probably more regulators than at any other institution that didn't catch that problem in anything like real time," Vitter said. "It underscores what I consider a basic flaw of Dodd-Frank in not imposing more systemic reforms."
The Louisiana Republican outlined four key reforms in their new bill: minimum capital levels for all banks and even higher levels for institutions with over $500 billion in assets; requiring banks to hold more tangible forms of capital to meet those minimum requirements; preventing nonbank access to federal subsidies reserved for banks; and regulatory relief for community banks.
There are "provisions of the law, including Dodd-Frank, that we think are overkill, burdensome, [and] don't really accomplish anything for smaller institutions," Vitter said.
Their preview suggests heavy influence in drafting the legislation from other policymakers who have been the most vocal about the need to eliminate too big to fail, including Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig and Federal Reserve Bank of Dallas President Richard Fisher.
Hoenig, in particular, has given several speeches of late on two elements that appear to be part of the senators' focus: using tangible equity to measure capital instead of the risk-weighting of assets favored in the Basel III capital accord, and keeping the federal safety net away from nonbanks.
"We think" that risk weighting system "can be far too easily gamed," Viter said of Basel, adding that the bill "suggests broadly a framework that's pretty different from notions like Basel III" by focusing "on much more transparency and … things that can be more precisely measured and less easily gamed."
Another provision, Vitter said, is meant to ensure that federal deposit insurance and the Federal Reserve Board's discount window are "reined back in to focus on their original intent, which is the core depository institution and not ancillary activities."
But the senators also stressed their intention not to go too far in their approach. Vitter noted that the legislation to be unveiled Wednesday will not include the same specific capital requirements laid out in an earlier draft that had been obtained by the media. That version included a 10% across-the-board capital requirement for all banks and a 15% requirement for banks with more than $400 billion of assets. Vitter's comments suggested the new threshold was at least $500 billion of assets, among other changes.
Observers have speculated that Vitter and Brown are likely to dial-back any across-the-board capital hike in order to secure community bank support for the bill.
Vitter said the two lawmakers are trying to achieve balance.
"I searched with Sherrod for [how] … we could impose systemic reforms that wouldn't be heavy handed or wouldn't mandate certain things by the government, but would set requirements and let actors in the market adjust to them as they will," he said. "We thought capital requirements — focusing on that — was a good, effective way to do that."
But Vitter said the bill was not an attempt to break up the big banks, as the legislation has often been portrayed in the media.
"It's not our intent to necessarily cause that. It is our intent to have much more protection against a crisis and against a taxpayer bailout in a crisis," Vitter said. "And it is our intent to level the playing field and take away a government … subsidy, if you will, that exists in the market now favoring size."
Brown suggested the final legislation would not go as far as he has proposed in previous attempts to further limit systemic risks.
"The idea [of the bill] is to restore the market, if you will, in the financial system," Brown said, noting that he will continue to consider additional legislation similar to an earlier bill he sponsored with former Sen. Ted Kaufman. That legislation would have imposed stricter size limits on the largest institutions.
The Ohio Democrat said that the constituency of voices now favoring tough measures to limit systemic risk has grown significantly.
"We're seeing a sea change, in fact, of support for this. … I think that's why this legislation, which we will introduce tomorrow, will have a lot more support than certainly it would have a couple years ago," Brown said.