Big banks’ disproportionate reliance on U.S. aid after the credit crisis reinforces the need for additional steps to ensure the end of too big to fail, Senators Sherrod Brown and David Vitter said.
Brown and Vitter, co-sponsors of a plan to impose a 15 percent capital requirement on the biggest lenders, commented after the release yesterday of a Government Accountability Office study that showed such firms made greater use of bailout programs introduced after markets collapsed in 2008.
The GAO findings represent the first of two reports responding to a request by Brown, an Ohio Democrat, and Vitter, a Louisiana Republican, to put a dollar figure on the benefit derived from U.S. aid by the largest bank holding companies. The number sought by the lawmakers, who say the big banks have grown by $2 trillion since the crisis, will be included in a second report next year, the GAO said.
“If big banks want to continue risky practices, they should do so with their own equity on the line,” Brown said in a statement. The GAO’s work “underscores the need to pass our legislation to ensure that these types of bailouts will not happen in the future by imposing sensible capital requirements.”
Larger bank holding companies, which rely on short-term funding markets, made greater use of aid programs during the crisis than did smaller banks mainly funded by deposits, the GAO said. Aid use measured as the percentage of total assets supported by programs was higher for banks with more than $50 billion in assets, according to the report.
The Dodd-Frank Act calls for banks to write plans for how they could safely be dismantled in bankruptcy, and empowers the Federal Deposit Insurance Corp. to wind down lenders while imposing losses on shareholders and creditors. It also withdrew options used by the Federal Reserve to aid banks in the crisis.
The GAO urged that the Fed finish policies clarifying that it can no longer bail out out individual firms and can only use emergency powers to provide broad-based liquidity to the system, with Treasury secretary approval.
The report included a response from Fed General Counsel Scott Alvarez agreeing to the recommendation and pointing out the agency has said it may be done by the end of the year.
Brown and Vitter want to go beyond Dodd-Frank and impose the 15 percent capital requirement on banks with more than $500 billion in assets, a group that currently includes at least six lenders: JPMorgan Chase & Co. (JPM:US), Citigroup Inc. (C:US), Goldman Sachs Group Inc. (GS:US) and Morgan Stanley (MS:US), all based in New York, as well as Charlotte, North Carolina-based Bank of America Corp. (BAC:US) and San Francisco-based Wells Fargo & Co. (WFC:US)
Janet Yellen, President Barack Obama’s nominee to be Federal Reserve chairman, said in a Senate confirmation hearing yesterday that “most studies point to some subsidy that may reflect too big to fail,” adding that it’s possible other factors contribute to big banks’ getting lower borrowing costs.
“Addressing too big to fail has to be among the most important goals of the post-crisis period,” Yellen told Brown at the Senate Banking Committee hearing. “It creates moral hazard; it erodes market discipline.”
When considering the impact of the bailouts, people “should not lose sight” of the fact that government intervention worked, Frank Keating, president and chief executive officer of the American Bankers Association, said in a statement yesterday.
“It’s important to recognize that much has changed since the crisis,” Keating said, citing tougher capital rules and liquidity levels. “Markets have reacted, imposing higher funding costs on institutions perceived to pose higher risk. And banks of all sizes continue to be instrumental in helping businesses in our economy grow and create jobs.”
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