In a conference call with reporters, Sens. Sherrod Brown (D-OH) and
Ted Kaufman (D-DE) introduced a bill, The Safe Banking Act of 2010,
which would mandate hard leverage and size caps on financial
institutions and force the breakup of many of the largest mega-banks.
The duo planned to introduce their legislation as an amendment to the
financial reform bill expected next week.
The bill would place a cap on any financial institution, limiting
their total assets to 3% of GDP (that would lower to 2% for banks, as
opposed to 3% for non-bank institutions). Currently, the 6 largest
banks have holdings that equal 63% of GDP. The Safe Banking Act would
also impose a 10% cap on any bank holding company’s share of insured
deposits. Bank holding companies and “selected nonbank financial
institutions” would have a leverage limit of 6%, meaning that they
would not be able to lend out more than around sixteen dollars for
every dollar of capital in house.
In his opening statement, Brown said “If we’re going to prevent big
banks from putting our entire economy at risk, we need to place
sensible size limits on our nation’s behemoth banks. We need to ensure
that if banks gamble, they have the resources to cover their losses.”
Sen. Kaufman, who has been a hero on this issue for his strong stands
against too big to fail, added that “this is exactly what we need,”
because financial institutions don’t need this kind of size to compete
internationally, and they just put the nation’s financial system
needlessly at risk. He explained that we cannot leave the question of
size and leverage caps to the regulators, because they already have the
authority under existing statutes to institute these size and leverage
caps, and they haven’t done it.
While this legislation has been introduced as a standalone bill,
Brown said that they would introduce in during the financial reform
debate as either one or two amendments (presumably splitting the size
and leverage caps). Sen. Kaufman described some other amendments,
including a reinstitution of the Glass-Steagall Act with Maria Cantwell
and John McCain, and a ban on proprietary trading a la the Volcker rule
with Carl Levin and Jeff Merkley. However, he said, this bill was “the
number one priority.”
So far, the bill has three other co-sponsors: Bob Casey, Sheldon
Whitehouse and Jeff Merkley. Citing Alan Greenspan’s statement that too
big to fail is too big, and the bipartisan support for the concept of
breaking up the megabanks from Federal Reserve regional bank heads and
other experts, Brown challenged Republicans to join them on this
amendment. If they’re so concerned about ending too big to fail, the
GOP should want to include this legislation, he said.
Brown predicted that the bill would help boost lending to small
businesses by increasing competition. He added that “banks with one
trillion dollars in liabilities are inherently risky… The SAFE Banking
Act prevents megabanks from controlling too much of our nation’s wealth
– no one investment bank or financial institution should be able to
risk more than three percent of our nation’s gross domestic product and
they should have enough money to back up their liabilities.”
Kaufman stressed that whatever legislation is written to deal with
the financial crisis of 2008 must be useful for the long haul. We can
limit size and leverage now or later, he cautioned, saying that this
policy must last 50 years down the road, the way legislation did after
the stock market crash of 1929. “Limiting size and leverage are
redundant fail-safe provisions to prevent a dangerous outcome. Senator
Brown and I are proposing a complementary idea, not a substitute,”
Kaufman said in a statement.
Brown and Kaufman were joined on the call by David Borris of the
Main Street Alliance, a coalition of small businesses who support Wall
Street reform. They sent a letter to Harry Reid today expressing
support for the Safe Banking Act.
This bill is where the action is in Wall Street reform. Whether or
not it will truly end too big to fail can be seen in whether or not
this gets added to the overall package.