Vitter, Brown Press for Higher Capital Surcharges on Megabanks

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WASHINGTON — Sens. David Vitter and Sherrod Brown are encouraging bank regulators to impose a higher capital surcharge for the largest U.S. banks.

In a letter to Federal Reserve Board Chairman Ben Bernanke, the two members of the Senate Banking Committee suggested regulators were missing a "huge opportunity" to address the problems of "too big to fail" by setting the surcharge on systemically important financial institutions "far too low."

They urged the Fed to revisit its proposed rule under Dodd-Frank and change it so that the megabanks would be required to hold more loss-absorbing capital than their counterparts, smaller regional and community banks.

"The surcharge on the megabanks should be high enough that it will incent them to become smaller or will help to ensure they can weather the next crisis without another taxpayer bailout," they wrote in their Aug. 6 letter.

The senators made the case that "all SIFIs are not created equal" and that regulators should keep that in mind as they establish capital surcharges that meet the requirements under Basel III and Dodd-Frank.

In December, the Fed revealed a package of rules, which implement Section 165 of the regulatory reform law, covering some of the biggest issues in financial services, including risk-based capital requirements, leverage, resolution planning and concentration limits.

The proposal also began the process of setting out whether firms with assets of $50 billion or above would face an additional capital surcharge.

"The proposed rule is ultimately just a baby step in the correct direction," Vitter and Brown wrote. "The board must do more in order to protect taxpayers and the financial system."

The Basel Committee on Banking Supervision last year identified 29 institutions as globally systemically important banks. Eight of them are U.S. banks, but none are regional banks.

Such banks will face a surcharge between 1% and 2.5%. That surcharge would come on top of a 7% Tier 1 common equity banks must maintain.

The Fed's plan allows for the possibility that banks not deemed globally significant but which hold more than $50 billion of assets could face a surcharge too. But regulators have yet to decide how much the surcharge should be, if any.

In their letter, the senators said the biggest banks should face an even larger surcharge, and emphasized that smaller, regional banks should be treated differently.

"These metrics clearly demonstrate that U.S. regulators must focus their efforts to impose enhanced capital requirements on the largest, most complex financial institutions, and not the smaller, regional institutions that engage in traditional banking services and whose systemic footprint is limited or inconsequential," they wrote.

They also backed regulators' contention that supervision and capital requirements should not be based solely on size.

"Oversight should not remain constant once particular thresholds have been crossed, so that a large regional bank that makes loans to consumers and small businesses is not treated the same way as a trillion-dollar money-center bank," they wrote. "Rules for capital and leverage should move on a sliding scale, with a focus on the largest and most complex megabanks."

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