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4 Feb 2013
US regulators call for restructuring of megabanks
The scars of the 2007 financial crisis in the United States remains fresh as top U.S. bank regulators and lawmakers are advocating for action to sequester the risk that the government again winds up financing the rescue of one or more of the country’s biggest financial institutions.
The debate’s officials clearly do not lack the pedigree, which includes Federal Reserve Governor Daniel Tarullo, Dallas Fed President Richard Fisher and Senator Sherrod Brown, who all share the view that the 2010 Dodd-Frank Act failed to curb the growth of large banks after promising in its preamble to “end too big to fail.”
Amidst several outlooks and contingencies, strategies under consideration range from legislation that would cap the size of big banks or make them raise more capital to more regulatory-based actions to discourage mergers or require that financial firms hold specified levels of long-term debt to convert into equity in a failure. Ultimately, the push for revisiting the law or writing new rules “is absolutely driven by a sense that Dodd-Frank did not end too big to fail.” noted Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington.
Three of the four largest U.S. banks, i.e. JP Morgan Chase & Co. (JPM), Bank of America Corp (BAC), and Wells Fargo & Co. (WFC) are much more vast today than they were back in the critical stages marking the prelude of the 2007 crisis, heightening the risk of another economic cataclysm if one gets into trouble. In particular, JPMorgan’s 2012 trading loss of more than USD $6.2 billion from a bet on credit derivatives raised questions about whether the largest institutions have grown too complex for oversight.
This miscalculation is among events that “have proven ‘too big to fail’ banks are also too big to effectively manage and too big to regulate,” stated Brown, an Ohio Democrat, “The question is no longer about whether these megabanks should be restructured, but how we should do it.” In a move to essentially restructure the behemoth banking entities, Brown and fellow Banking Committee member David Vitter, a Louisiana Republican, are contemplating legislation that would impose capital levels on the largest banks higher than those agreed to by the Basel Committee on Banking Supervision and the Financial Stability Board, which set global standards.
Brown also plans to reintroduce a bill he failed to include in Dodd-Frank or passed in the last Congress that would effectively cap bank size and limit non-deposit liabilities. The two senators have asked the Government Accountability Office to look into the economic benefits including lower borrowing costs that banks with more than $500 billion in assets receive as a result of federal deposit insurance, access to the Fed’s discount window and investor perceptions that they’ll be rescued in times of trouble.
The debate’s officials clearly do not lack the pedigree, which includes Federal Reserve Governor Daniel Tarullo, Dallas Fed President Richard Fisher and Senator Sherrod Brown, who all share the view that the 2010 Dodd-Frank Act failed to curb the growth of large banks after promising in its preamble to “end too big to fail.”
Amidst several outlooks and contingencies, strategies under consideration range from legislation that would cap the size of big banks or make them raise more capital to more regulatory-based actions to discourage mergers or require that financial firms hold specified levels of long-term debt to convert into equity in a failure. Ultimately, the push for revisiting the law or writing new rules “is absolutely driven by a sense that Dodd-Frank did not end too big to fail.” noted Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington.
Three of the four largest U.S. banks, i.e. JP Morgan Chase & Co. (JPM), Bank of America Corp (BAC), and Wells Fargo & Co. (WFC) are much more vast today than they were back in the critical stages marking the prelude of the 2007 crisis, heightening the risk of another economic cataclysm if one gets into trouble. In particular, JPMorgan’s 2012 trading loss of more than USD $6.2 billion from a bet on credit derivatives raised questions about whether the largest institutions have grown too complex for oversight.
This miscalculation is among events that “have proven ‘too big to fail’ banks are also too big to effectively manage and too big to regulate,” stated Brown, an Ohio Democrat, “The question is no longer about whether these megabanks should be restructured, but how we should do it.” In a move to essentially restructure the behemoth banking entities, Brown and fellow Banking Committee member David Vitter, a Louisiana Republican, are contemplating legislation that would impose capital levels on the largest banks higher than those agreed to by the Basel Committee on Banking Supervision and the Financial Stability Board, which set global standards.
Brown also plans to reintroduce a bill he failed to include in Dodd-Frank or passed in the last Congress that would effectively cap bank size and limit non-deposit liabilities. The two senators have asked the Government Accountability Office to look into the economic benefits including lower borrowing costs that banks with more than $500 billion in assets receive as a result of federal deposit insurance, access to the Fed’s discount window and investor perceptions that they’ll be rescued in times of trouble.