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Too-Big-to-Fail Bill Seen as Fix for Dodd-Frank Act’s Flaws

April 25, 2013

April 24 (Bloomberg) -- "Too-big-to-fail" legislation unveiled in Washington today is needed to rein in the biggest U.S. banks because the Dodd-Frank Act has failed to guard taxpayers against future bailouts, the bill’s sponsors said.

The four largest banks -- JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co -- "are nearly $2 trillion larger than they were" before getting U.S. aid to help them weather the 2008 credit crisis, Senator Sherrod Brown said in a news conference today.

"If big banks want to continue risky practices, they should do so with their own assets," said Brown, an Ohio Democrat. "Our bill will ensure a level playing field for all financial institutions by ending the subsidy for Wall Street megabanks and requiring banks to have adequate capital."

Brown and Republican Senator David Vitter of Louisiana, whose plan is opposed by key lawmakers, are proposing a 15 percent capital requirement for so-called megabanks as a way to reduce risk and remove the perception that they would get bailouts in a crisis. Mid-size and regional banks, those between $500 billion and $50 billion in assets, would need to have 8 percent capital relative to assets.

"It is our intent to have much more protection against a crisis and against a taxpayer bailout in a crisis, and it is our intent to level the playing field and take away a government policy subsidy, if you will, that exists in the market now favoring size," Vitter said during a roundtable meeting at the National Press Club yesterday.

Mid-size ‘Losers’

The $500 billion threshold effectively puts a cap on growth for regional banks such as PNC Financial Services Group Inc. and BB&T Corp., which would be "losers" under the bill, according to Joseph Engelhard, a former Treasury Department official who is now senior vice president at Capital Alpha Partners LLC., a Washington-based firm that "offers predictive insight for capital-markets professionals," according to its website.

"To the extent this bill gets close to passage it will make the Fed and other regulators work even harder to implement Dodd-Frank in a tougher way," Englehard said in an interview.

The Dodd-Frank financial-regulation law was enacted in 2010, two years after a credit crisis that led to the collapse of Lehman Brothers Holdings Inc. and taxpayer bailouts that helped sustain other leading financial firms. Implementation has been slowed amid disagreement within regulatory agencies and legal challenges to some rules.

Traditional Banking

At least six banks have assets exceeding the $500 billion threshold Vitter cited yesterday for the highest capital standard: JPMorgan, Citigroup, Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, as well as Charlotte, North Carolina-based Bank of America and San Francisco-based Wells Fargo.

Brown, 60, and Vitter, 51, say their bill would limit the government safety net of deposit insurance and discount lending to traditional banking operations and require affiliates and subsidiaries of large banks to be separately capitalized. It would provide regulatory relief to community banks including changes to a qualified mortgage rule, creating an independent bank examiner ombudsman for those institutions and adopting privacy notice simplification.

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