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Concerns about bank size and interconnectedness have reached a fever pitch lately for a number of reasons. Here's why.
April 1
WASHINGTON — A bipartisan group of senators are urging regulators to focus on ending "too big to fail" while delaying proposed Basel III capital requirements for small institutions.
Sens. Bob Corker, R-Tenn., Sherrod Brown, D-Ohio, Elizabeth Warren, D-Mass., David Vitter, R-La., and Susan Collins, R-Maine, sent a letter Tuesday to the banking agencies asking them to quickly finalize new capital and liquidity requirements for large institutions.
The missive comes as an increasing number of prominent policymakers and other public officials voice concerns over whether some institutions remain "too big to fail," and as several lawmakers have begun pushing their own fixes. Brown and Vitter are expected to shortly introduce legislation mandating higher capital requirements and Sen. Bernie Sanders, I-Vt., and Rep. Brad Sherman, D-Calif., introduced a bill to break up the big banks on Tuesday. The lawmakers' letter, however, focuses on rules already being drafted, not on new legislation.
"By acting to substantially strengthen capital requirements and to ensure that future losses of a large bank failure will be absorbed by its shareholders and unsecured creditors, you [financial regulators] will further your statutory mandate to protect the public against financial instability and go a long way toward ending too-big-to-fail," the lawmakers' letter says.
The bipartisan group focused its recommendations on the proposed Basel III requirements and enhanced prudential standards mandated under the Dodd-Frank reform law.
"The Basel Committee agreed to an international leverage ratio in its 2010 Basel III capital accord to address weaknesses in the use of risk-based standards. But this leverage ratio will only have meaning if it is sufficiently strong," the letter says. "And just as importantly, while the use of asset risk weights makes some sense, we should not rely on them completely. An appropriate minimum overall capital ratio in exchange for a reduced reliance on models would make sense."
It also asks regulators to consider delaying and simplifying the Basel requirements for smaller institutions.
"The new Basel III capital standards were designed for large, internationally active banks, as was appropriate. We urge you to complete work on capital standards for the largest banks before turning to the smaller institutions," it says. "Then, devise a simpler framework that, unlike the current proposals, will be within the reach and capabilities of community institutions."
The letter advises regulators to follow Federal Deposit Insurance Corp. and Federal Reserve Board recommendations that would require institutions "to issue an appropriate amount of equity and long-term, unsecured debt at the holding company level," as part of new prudential standards.
Observers said the letter is also important because it endorsed regulatory efforts to require bank holding companies to issue equity and long-term unsecured debt to absorb losses.
"We urge you to consider the vital step of having loss absorption capacity at the holding company level, as you draft rules for the regulation of large systemically risky firms," the letter says.
Former FDIC Chairman Sheila Bair said such a proposal is critical.
"It's significant they've endorsed a minimum requirement for debt and equity issuance for holding companies," she said in an interview. "That's key to making the resolution strategy work."
Overall, she said the letter would encourage regulators to focus on the most important part of financial reform.
"Capital and resolution authority are central to what Dodd-Frank is about and need to have a higher priority," she said.
