[Congressional Record Volume 159, Number 99 (Thursday, July 11, 2013)]
[Senate]
[Pages S5661-S5662]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
TOO BIG TO FAIL
Mr. BROWN. Mr. President, there is broad agreement that overleveraged
financial institutions significantly contributed, to put it mildly, to
the 2008 financial crisis and that they were bailed out because
everyone knows they are too big to fail.
Years later--5 years later now--there is an implicit assumption that
the largest megabanks--the five or six largest banks in the country--
are still too big to fail. That means the markets give them funding
advantages that experts estimate are as high as 50 or 60 or 70 or even
80 basis points.
That means when they go in the capital markets, they can borrow money
at close to 1 percent. Eighty-eight basis points is fourth-fifths of 1
percent. They can borrow money at a lower cost than virtually anyone
else in our economy.
Studies from Bloomberg have shown that this can mean a subsidy of
upward of $80 billion to these five, six, seven megabanks--these large
megabanks.
Last year, as a result, my colleague Senator Vitter and I began to
push the banking regulators--the Federal Reserve, the Office of the
Comptroller of the Currency, and the FDIC, the Federal Deposit
Insurance Corporation--to use stronger capital and leverage rules to
end this too-big-to-fail subsidy.
There is now bipartisan agreement that imposing more stringent
capital
[[Page S5662]]
and leverage requirements for the largest financial institutions could
help prevent the next financial crisis and prevent future bailouts.
Unfortunately, the Basel Committee--named after a city in
Switzerland--responsible for the Basel III international capital rules
adopted a mere 3-percent leverage ratio.
In 2007, the investment banks Bear Stearns and Lehman Brothers were
leveraged 33 to 1 and 31 to 1, respectively. These institutions would
have been compliant with the Basel III international leverage ratio,
and yet each would have become insolvent, or nearly insolvent, if the
value of their assets declined by as little as 3 percent. That meant
they only had sort of 3 percent protection, and if their assets
declined by more than 3 percent, they would be what you call
underwater. They simply would be a failing, unsustainable institution
or bank.
I am pleased to say that this week regulators finally went beyond
these inadequate rules and proposed a 6-percent leverage ratio for
insured banks. I said earlier, Senator Vitter and I had argued for this
and were pushing the banking regulators to do what they, in fact, did
this week.
The move is a necessary step in the right direction. It shows how far
this conversation has gone in a short time. But there is more work to
be done. Let me explain several things we can do now.
First, the number needs to be higher. The Wall Street Journal
editorial board--not a group of people with whom I often agree or with
whom I see eye to eye very often--wrote this morning about these rules:
[O]ur preference would be to go north of 6 percent.
To be higher.
Why not approach the capital levels that small finance
companies without government backing are required by markets
to hold, which can run into the teens?
They are required by markets. For the megabanks, the market does not
quite respond the same way because of their economic and their
political power.
Second, I am still concerned that banks can use risk weights and
their internal models to game capital rules. This amounts to the banks
determining for themselves--this is not some government body or some
unaligned group of economists--this amounts to the banks determining
for themselves how risky their assets are, thereby setting their own
capital requirements.
The Financial Times said today the biggest banks plan to use
``optimization'' strategies--not more equity--to meet the new leverage
ratio.
``We're going to be able to pull a lot of levers,'' said an
executive at a large US bank on Wednesday. . . . Analysts at
Goldman Sachs noted in research for clients that ``banks have
a lot of options to mitigate the impact.''
That is why we need simpler rules that cannot be gamed by Wall
Street, and this rule cannot be watered down by Wall Street lobbyists.
There is no reason agencies should not finalize these rules and begin
implementing their rules tomorrow--not go through the long rules
process. We cannot wait. Small businesses and families cannot afford to
wait, neither can our economy.
Finally, there is more work to be done to rein in Wall Street
megabanks. Senator Vitter and I have a bill that would do this--the
bipartisan too big to fail act. It would restore market discipline by
raising megabanks' capital requirements and limiting the Federal safety
net that supports them.
I have also proposed legislation called the SAFE Banking Act to cap
the amount of nondeposit liabilities that any single megabank can have.
The regulators have begun to do their jobs. It is time for Congress
to do its job. This week was a good week. It was a step in the right
direction, but it is time to finish the job. It is time to end too big
to fail once and for all.
I yield the floor.
The PRESIDING OFFICER. The Senator from Arizona.
(The remarks of Mr. McCain and Ms. Warren pertaining to the
introduction of S. 1282 are printed in today's Record under
``Statements on Introduced Bills and Joint Resolutions.'')
____________________