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‘Too big to fail’ bill would boost big bank capital standards

Banks with more than $500 billion in assets would face higher capital standards meant to reduce risk and end an implied subsidy for the biggest lenders under a new bill.

Senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, said in a discussion in Washington on Wednesday that their “too big to fail” legislation will focus federal assistance on commercial banking activities while granting relief to community banks. The measure will face a tough path to passage in the face of opposition from key Senators and a lack of support in the Republican-led House.

“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 the roundtable meeting at the National Press Club.

Brown and Vitter planned to unveil their proposal amid growing calls to remove the threat that risk-taking by the biggest financial firms might spark a repeat of the 2008 credit crisis that led to the collapse of Lehman Brothers Holdings Inc. and government bailouts for companies including Citigroup Inc. (NYSE: C) and New York-based American International Group. Inc.

At least six U.S. banks have assets of more than $500 billion: JPMorgan Chase & Co. (NYSE: JPM), Citigroup, Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS), all based in New York, as well as Charlotte, N.C.-based Bank of America Corp. (NYSE: BAC) and San Francisco-based Wells Fargo & Co. (NYSE: WFC).

Long-term debt

Federal Reserve Governor Daniel Tarullo, Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig, Dallas Federal Reserve President Richard Fisher and former FDIC Chairman Sheila Bair are among those calling for steps such as breaking up the biggest banks or imposing higher capital to imposing standards for long-term debt.

“We’re seeing a sea change in fact of support for this in the Senate especially outside the Senate,” Brown said at the discussion, which was sponsored by American Banker. “I think that’s why this legislation, which we will introduce tomorrow, will have a lot more support than it would certainly a couple of years ago and a lot more than people expect.”

The Brown-Vitter bill would set minimum capital standards for banks with more than $500 billion in assets and for regional banks, Vitter said Wednesday. That level is higher than the $400 billion standard included in an earlier leaked draft.

The measure also would limit FDIC insurance to core deposit activities and regulatory relief provisions for banks with less than $10 billion in assets, Vitter said.

Tough road

The bill faces obstacles to enactment, starting in the Senate Banking Committee, where Chairman Tim Johnson, a South Dakota Democrat, has said regulators should finish work on Dodd- Frank before determining whether it solves too big to fail. Sen. Mike Crapo, the Idaho lawmaker who is the panel’s top Republican, said in an interview Wednesday that setting capital standards is job for regulators, not legislators.

“Enactment in this Congress remains a big challenge,” said Jaret Seiberg, senior policy analyst at Washington Research Group, a unit of Guggenheim Securities LLC. “There simply is not any support from the key congressional leaders that one would need to make adoption a good bet.”

Supporters of the Brown-Vitter plan say further measures to curb risk are needed because the Dodd-Frank Act failed to address the systemic threat posed by the largest banks. Bankers have said those seeking additional steps aren’t considering the regulations in the 2010 law including so-called living wills that will lay out how financial firms are to be unwound after a collapse and FDIC resolution authority for failed companies.

“I want to have tough regulation, which is what I think Dodd-Frank stood for and explicitly says,” Sen. Carl Levin, the Michigan Democrat, said Wednesday in an interview. “I’m fighting for that. I can’t at the same time give up on that and say ‘break up the banks.’”

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