Can two senators end ‘too big to fail’?
Barry Ritholtz
Washington Post, May 10 2013



Last month, an unlikely pair of senators — Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican — introduced a non-binding resolution calling for the end of the implicit subsidies that “too big to fail” (TBTF) banks enjoy.

The Senate voted 99-0 in support of the measure.

This month, they have pushed their ideas into actual legislation: They introduced a bill called the “Terminating Bailouts for Taxpayer Fairness (TBTF) Act of 2013.” This bipartisan legislation would help eliminate the government subsidies that put taxpayers at risk and also give the largest US banks an advantage over their smaller competitors.

Just how much of a subsidy are the banks receiving? An International Montetary Fund Working Paper quantified it as creating an 80 percent basis point advantage to TBTF banks. A 2012 FDIC study found similar advantages. The implicit government guarantee that these banks would not be allowed to fail allowed them to obtain credit at a more advantageous rate. Bloomberg calculated that this amounted to a taxpayer subsidy of $83 billion a year to the 10 largest U.S. banks, ranked by assets — and $64 billion to the five largest. At the request of Brown and Vitter, the Government Accounting Office is trying to more precisely quantify the annual subsidy to megabanks from the U.S. government.

In this column, I want to look at two broad issues: First, what does the legislation (TBTF Act, S. 798) purport to do? How would it affect the competitive landscape for community and regional banks? Could it prevent future megabank bailouts?

Second, has this left-right duo crafted a bill that, if it were to pass, could serve as a formula for for getting things done in a divided Congress?

Let’s begin with the broader strokes of the TBTF act. The bill’s appeal is its simplicity. It does not require complex formulas. Enforcement is simple and easily executed. There is no need for new regulatory apparatus that might one day become “captured” by its charges. Rather, it uses basic formulas to mandate adequate capital reserves. The legislation eliminates most opportunities for banker shenanigans, such as hiding liabilities off the balance sheet or in “side pockets.” It also treats all asset classes and liabilities equally – including derivatives.

The broad strokes of the TBFA Act:

●Mandates a flat 15 percent capital requirement for any institution with more than $500 billion in assets

●Does not rely on ratings agency grades

●Removes off-balance-sheet assets and liabilities as different classes — they are treated as if they are on the balance sheet

●Requires derivatives positions to be included in a bank’s consolidated assets

●Requires that the capital cushion a bank holds be liquid

(Note that these five elements are much stricter than Basel III regulatory requirements. Brown-Vitter renders it irrelevant to U.S. banks).

Who could be opposed to such a straightforward form of taxpayer protection and risk management? Start with the TBTF companies themselves. The largest U.S. banks — JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America and Wells Fargo — meet the new TBTF criteria of $500 billion in assets. None of these companies is going to be happy about actually having to have real liquid reserves to hold against future losses.

Reduce their leverage and back out the government subsidies, and suddenly these banks look a whole lot less profitable. That won’t be good for the outsized bonuses that senior management has been paying themselves. Hence, it is no surprise that the American Bankers Association, the lobbying organization often associated with the largest banks, is also against this.

Then there are the rating agencies. The Brown Vitter TBTF act renders their ratings irrelevant, so far as the biggest banks are concerned. Note that rating agencies like Standard & Poor’s and Moody’s were the grand enablers of the credit crisis and financial collapse. Their ratings were a form of pay-for-play analyses, bought and paid for by Wall Street banks. Not surprisingly, Standard & Poor’s has already come out against the proposed legislation.

Brown Vitter has already gotten further than any other legislation that has sought to end TBTF. Why?

Simplicity: The most common complaint heard during the debate over Dodd-Frank was its complexity. Dodd-Frank mandated regulatory rulemaking from a patchwork of agencies requiring “10s of 1000s of pages” of new regulations.

The beauty of the TBTF Act is its simplicity — hard numbers for capital reserves. Banks must maintain a 15 percent capital reserve. For those people who complained that Dodd-Frank was too complex, let’s see how they like “the new simplicity.”

Broad ideological support: A diverse cross-section of parties has found that their interests align with this legislation.

Anyone who opposed the bank bailouts likes the ideas of adequate capital buffers. So, too, do those people who dislike broad regulatory complexity and the bureaucratic infrastructure it creates. Hence, support for the bill comes from a broad spectrum of political thought.

By removing competitive advantages megabanks have over smaller and regional community bankers, the bill is a straightforward support of industry competition. That appeals to libertarians and consumer advocates alike.

Splitting the bank lobby: Perhaps the most significant development has been among the banking lobby itself. Before Brown-Vitter TBTF, the industry responded to all proposed regulatory reform legislation in lockstep. The new proposal splits the industry cleanly in half, with the megabanks on one side and everyone else on the other.

Consider the Independent Community Bankers of America , which has more than 5,000 member banks with more than $2 trillion in deposits and assets. In a news release applauding the bill, the organization urged all community banks to join the association in advocating passage of the bil. Bill Loving, the ICBA’s president and chief executive of Pendleton Community Bank, added, “This legislation will reduce systemic risk, protect taxpayers and put our nation’s community banks on a competitively balanced playing field.”

Cleaving the bank lobby in two may give the bill a fighting chance of passing where prior legislative proposal had no chance.

Federal Deposit Insurance Corp. support: Also of note is the fact that the FDIC’s vice-chairman Thomas Hoenig, a longtime critic of TBTF banks, is in favor the legislation. The FDIC guarantees deposits when banks fail, and anything that reduces the risk of bank collapse garners its support.


The idea that two senators from opposite sides of the ideological spectrum can find common ground to attack a problem with a simple solution is novel in the Senate these days. If Brown and Vitter manage to end the subsidies to banks deemed “too big to fail,” they will have accomplished more than “merely” preventing the next financial crisis. They will have helped to create a blueprint for how to get things done in an era of partisan strife.

That is a worthy goal all Americans should be grateful for.


Category: Bailouts, Politics

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Can two senators end ‘too big to fail’?”

  1. DeDude says:

    “They will have helped to create a blueprint for how to get things done in an era of partisan strife”

    I hope you are right and that Mitch McConnell now after the election will put the goal of “denying Obama bipartisanship” second to the goal of giving the country much needed legislation. His failure on the top priority to “make Obama a one term president” may have gotten a smarter person to stop and re-evaluate – I am not sure about Mitch. He may look at continued gridlock as a way to prevent another democrat from becoming president in 2016. He was trained by the Gingrinch so to him the interest of the GOP always comes before the interest of the country.

  2. Petey Wheatstraw says:

    We’re fixin’ to find out, once and for all time, who runs this country. Are these “Banks” ‘Too Big To Fail’ or are they actually ‘Too Big To Fuck With’?

    Can a law without exploitable loopholes make it into the books? There is plenty o’ money to be made via the production of loopholes.

    “This bipartisan legislation would help eliminate the government subsidies that put taxpayers at risk and also give the largest US banks an advantage over their smaller competitors.”

    But . . . but . . . Free Market Capitalism!

    “Second, has this left-right duo crafted a bill that, if it were to pass, could serve as a formula for for getting things done in a divided Congress?”

    But . . . but . . . Benghazi!

    “That is a worthy goal all Americans should be grateful for.”

    The effort is admirable and appreciated, but we’d be far more grateful if the ball were in the end zone.

  3. lotusblue says:

    Morning Barry,

    TBTF legislation is Great idea and should get some milege all round the media world.But,always a but,the legislators quietly pushing law that’ll allow SWAPS into FDIC insured bank subs alleviates any substantive TBTF legislation ! ! Economic calamity,certainly will befall our nation once again and with CDOs’,CDSs’,and prety much ANY AND ALL swaps nestled snuggly within the confines of FDIC coverage,
    TBTF lives on LAUGHINGLY within worldwide banking system ! Are you willing to dredge this back-door trick into light of day ?

  4. carleric says:

    I am shocked that there are two senators with brains bigger than a peanut…..we know thst Dodd and Franks were and are banking whores so no useful legislation could ever come out of anything they had their hankds on……pass the legislation, hand out the crying towels and move on….it is time Congress quits sucking up to the big banks under the guidance ob Benny Boy

  5. GeorgeBurnsWasRight says:

    I’ll be amazed if anything like this bill survives the lobbying of the banking industry.

    The influence of special interests is far stronger than the Democrat vs. Republican dynamic in the legislative process, IMO.

    Logically, there should have been common ground between the Tea Party and the Occupy Wall Street movements, but a combination of cultural differences and, again IMO, tactics by monied interests made sure that the two groups remained enemies.

  6. RW says:

    End TBTF? In a word, no; even as written and unamended the bill would not do that.

    I posted this when this bill was first mentioned here and have not heard or read anything that would modify Bill Black’s evaluation of the chances the bill will do more harm than good:

    Brown-Vitter Will Not and Cannot Work but it is Criminogenic

    Senators Sherrod Brown (D-OH) and David Vitter (R-LA) have introduced a bill entitled ‘Terminating Bailouts for Taxpayer Fairness Act of 2013.’ …Under Obama, bipartisan bills have a dismal fate because the Democrats negotiate away key elements necessary to create a good bill and add provisions that make parts of the bill harmful – just to pick up a few token co-sponsors – and then the Republicans kill good parts of the bill anyway and try to enact the bad parts.

    Brown-Vitter (BV) exemplifies all three problems. It would fail to achieve its desirable goals even if it became law. It would help the largest fraudulent banks continue to cripple effective examination. The Republicans will kill the well-meaning parts of the bill and try to enact the bad parts of the bill that are so bad that they are criminogenic.

    Bottom line, even in the unlikely event the bill were to pass into law relatively unscathed, it would not end SDI’s nor would it necessarily even require them to increase their capital if their books showed they possessed sufficient capital (one wonders if Brown or Vitter have ever heard of accounting control fraud). It would however supply a fig leaf for legislators who could now claim they “did something about tbtf” therefore there is a chance it could pass …and with appropriate amendments I have no doubt.

  7. Fred says:

    “We the People” have lost our Government. Congress does not represent the majority of the constituents, just the perceived important ones. Lobbyists representing the interests of the politically powerful, have the full attention of the Congress. They can legally bribe Congress for implementing lobbyist’s requests by contributing to cooperative Congressman’s “reelection campaign”. That’s the arranged system and it works! We get a long term Congressional patronage with a bought and paid for professional politician.

    Congress does not work for the citizen that voted for them. The only means we have to regain control of our Government is through our vote every two years. Do not vote for any incumbent. Vote for a candidate the pledges to not run for reelection. We must have “public servants” not “professional politicians”.

  8. RW says:

    It’s worth mentioning that another reason Brown-Vitter (BV) is unlikely to improve on Dodd-Frank (DF) is because DF already does what BV claims to do and has the additional virtue of already being law so there is less chance for Congress to screw it up, something they are virtually certain to do with BV (wouldn’t surprise me if BV becomes a vehicle to further water down an already tepid DF now that I think of it).

    Sheila Bair: Dodd-Frank really did end taxpayer bailouts

  9. countziggenpuss says:

    One thing I would change is “scaling-in” the capital requirement as size increases. So, rather than having only the $500 billion threshold, which creates a 15% capital requirement… start at $100 billion, requiring 10%, then $200 billion & 11%, $300 billion & 12%, etc.

  10. [...] Brown Vitter #TBTF Act: Can two senators end ‘too big to fail’? | Barry Ritholtz (Washington Pos… Sherrod Brown (D, OH) & David Vitter (R, LA) floated non-binding, bipartisan resolution that won unanimous 99-0 support in Senate. They’ve now drafted “Terminating Bailouts for Taxpayer Fairness Act of 2013,” which legislation cracks down on big banks: 1. Higher capital ratios- 15% minimum capital requirement for those with >$500B in assets 2. Capital reserves must be liquid 3. No regulatory reliance on ratings agencies 4. Off balance sheet items are treated as on balance sheet 5. Derivatives [gross notionals] included in consolidated assets [Terrific first stab at ending megabanks' advantage over community/local/regional competitors, which the IMF & FDIC estimate as 80bps from implicit taxpayer subsidies of $83B for the top 10 largest TBTFs ($64B for the top 5).] [...]

  11. flyingfrogboy says:

    Ok, straight to the point : what are the chances of this passing ?!

  12. Onemoretime says:

    Let’s assume this bill go nowhere. So when the next crash comes this legislation will be waiting to be resurrected. At that point it should have much stronger appeal and a better chance of overcoming the financial lobby. Basically a variation of: “give them enough rope and they will hang themselves.”

  13. [...] Can two senators end ‘too big to fail’? Big Picture [...]

  14. TrainStation says:

    Thank you for the article.

    I will write to my congressman and ask him to support the TBTF Act of 2013.

  15. AmericanObserver says:

    Now if only we could get a constitutional amendment that no law or bill passed should be longer than this one, then we would make real headway in the direction of the country.

    Unlike most bills out there which are about special interests, this one seems to be about leveling the playing field. Way to go!