[Congressional Record (Bound Edition), Volume 159 (2013), Part 8]
[Senate]
[Page 11300]
[From the U.S. 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 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.'')

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