Brown-Vitter 2013: Senate's "Too Big to Fail" Legislation Is Actually Too Big to Succeed

There is currently legislation being advanced by Senators Sherrod Brown (D-Ohio) and David Vitter (R-Louisiana). An immediate oddity of the bill is visible right away: One of the sponsors is a liberal Democrat and the other a conservative Republican, from different parts of the United States. What could possibly bring these two very different men together to advance a single piece of legislation? The answer to that question is simple: a bill that seeks to bring a final end to the era of banks being “too big to fail.”

The federal government decided to bail out several major banks during the pinnacle of the economic crisis in 2008. Among them were Wells Fargo, JP Morgan Chase, and Bank of America. The reason for the massive payouts by the government to keep these banks afloat was that the banks were “too big to fail,” and if they were to go under, the impact on the stock market and the greater economy would be catastrophic.

After the government made this decision, the marketplace came to the conclusion that such massive banks would be inevitably bailed out in the future if they needed it. The market has continued under this assumption, even in the face of the Dodd-Frank Wall Street Reform Act which was designed to push such large banks to limit their risky loan practices and other unscrupulous activities, as well as provide more oversight to prevent the need for bailouts in the future.

It is this continued confidence in the market and among the banks that brings Brown and Vitter together. They are seeking to require the biggest banks, those with $500 billion or more in assets, to keep a minimum of 15% of those assets in reserve to cover any downturns that may take place in the future. Banks with at least $50 billion in assets must have 8% in reserve. All banks below the $50 billion point, which are mostly community banks, are generally considered to already have sufficient funds available due to their current tendency to have significant funds in reserve. These requirements would mean that the largest banks would have to keep significant amounts of money at the ready for any significant economic turmoil. While that may sound like a good plan with a bipartisan pedigree, Brown-Vitter has already faced significant pushback and will face a very difficult road.

One major criticism of the bill is that Dodd-Frank is still recent and has not had enough time to be fully implemented, and that the Brown-Vitter legislation is merely an impatient overreaction. Also, by requiring so much money to be kept in reserve, large banks that supply loans to large numbers of people and businesses would have less available to loan, creating a drag on the economy that is just now entering a solid run of recovery. Finally, this bill is quite possibly the most restrictive legislation yet aimed at major banks, even exceeding international standards that create a weighted system based on the relative risk of loans the banks have out. In a system that is very much globalized, banks can easily argue that these new restrictions would make them less competitive globally.

These complaints are already being voiced, and are sure to get louder as this legislation attempts to move forward. Ironically, given the bipartisan nature of the writers of the bill, the opposition to it is just as bipartisan. Tim Johnson (D-S.D.), the head of the Senate Banking Committee, has already stated that he feels Dodd-Frank should have time to be fully implemented, and Republican committee member Mike Crapo (R-Idaho) has also come out in favor of regulators setting capital reserve requirements rather than legislators. Taking the already strong voices of these two men in the Senate and combining them with the lobbying efforts that are sure to come, it certainly looks like it will be a tough battle to get the legislation anywhere at all.

My personal position is that this act, despite being fueled the by outrage of the general population, will almost certainly be killed, most likely in the Senate Banking Committee. Current opposition within the Senate will most definitely be bolstered by lobbying, and will ultimately end the bill before it has a chance to get anywhere.