Survey the landscape of the financial industry, after the meltdown on Wall Street and passage of the Dodd-Frank regulatory reworking, and the concern remains about the nation’s largest banks. They still are too big to fail. Thus, there is room for the legislation proposed last week by U.S. Sens. Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican. Their pairing reflects a broadening consensus that more steps are required to ensure stability in the industry by narrowing the prospects for big bank bailouts.
When banks are so big, a collapse likely to bring financial havoc, they benefit from the assumption that the federal government — or taxpayers — will come to the rescue. As Bloomberg and other analysts have shown, that results in a hefty subsidy, roughly $80 billion a year as big banks borrow at lower interest rates. The circumstances also invite big banks to take bigger risks, or make it more likely that they will run into big trouble.
The Dodd-Frank law takes aim at the problem. So are international regulators noodling changes. They have not gone far enough, still tied to complexities in rule-making that open the way for big banks to maneuver and dodge toward business as usual. The virtue of the Brown-Vitter legislation is its simplicity and transparency.
At its core, the bill calls for a straightforward and reasonable capital requirement, big banks having a cushion equivalent to 15 percent of their assets. This would leave the banks less vulnerable to the kinds of losses that would lead to a taxpayer bailout. It translates into banks setting aside a share of total assets. It also avoids the problem of assessing each asset on its specific level of risk, an approach that has fed gaming the system.
To be sure, the capital requirement is much larger than the 8 percent established by the international system. At the same time, recall how rating agencies awarded their highest mark to many mortgage-backed securities that triggered the financial calamity and, ultimately, the bailout.
Big banks and their lobbyists already have begun to fire back. They warn about the Brown-Vitter capital requirement and other provisions stunting economic growth. What the bill actually proposes is protection against something far worse. Big banks likely are more concerned about the requirement cutting into their big profits.
Note, too, the support of the nation’s community banks. They didn’t cause the financial meltdown. They understandably chafe at those responsible receiving big subsidies. Thus, the Brown-Vitter bill has the advantage of leveling the playing field, the resulting competition part of the needed discipline and stability in big banking.