Bill Introduced in Senate to End Too-Big-To-Fail

Senator Sherrod Brown of Ohio has introduced a bill that would end too-big-to-fail.  The bill, entitled that Safe, Accountable, Fair, & Efficient Banking Act of 2012 would take the following steps in order to achieve this goal:

  • Imposes a strict 10 percent cap on any bank’s share of the total amount of deposits of all insured banks in the U.S. This would eliminate loopholes in the existing statutory cap.
  • Imposes a strict 10 percent cap on the liabilities that any one financial company can take on, relative to the U.S. financial sector. Like the deposit concentration limit, this closes loopholes in existing law.
  • Imposes a limit on the non-deposit liabilities (including off-balance-sheet (OBS) exposure) of a bank holding company of 2 percent of GDP. No bank holding company could exceed $1.3 trillion.
  • Imposes a limit on the non-deposit liabilities (including OBS exposure) of any non-bank financial institution of 3 percent of GDP. No non-bank financial company could grow larger than $436 billion.
  • Codifies a 10 percent leverage limit (including OBS exposure) for large bank holding companies and selected nonbank financial institutions into law.
One of the primary impacts of this legislation would be to break up or reduce the size of our four largest banks – Wells Fargo, JP Morgan, Citi, and BofA.  I believe this would be a very positive step in the right direction.
Calls for the end of too-big-to-fail have grown louder in recent months.  Most notably, the Dallas Fed recently produced an awesome report written by Harvey Rosenblum titled ‘Choosing the Road to Prosperity – Why We Must End Too Big to Fail – Now‘.  The report does a great job of establishing how TBTF banks were “a primary culprit in magnifying the financial crisis” and “continue to play an important role in prolonging our economic malaise.” It’s well-written and easy to read, and I highly recommend reading it.
This bill is essentially the same as a bill that Brown proposed in 2010.  That bill only received 33 votes.  According to a New York Times article by Simon Johnson, this bill seems to have more support from both sides of the aisle.  I hope it passes.  Short of re-instating a strong Glass-Steagall Act, I think this is one of the better reforms we could undertake.

About Michael Kraus

Comments

  1. John Giagnorio says:

    It’s unfortunate that it takes regulation to make this happen, but it probably is the only way. I do wish the government would eliminate or at least seriously scale back deposit insurance. This is old but relevant: http://www.econtalk.org/archives/2009/10/calomiris_on_th.html.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>