In Washington last week, Democratic Sen. Sherrod Brown of Ohio previewed his so-called “too-big-to-fail” bank bill, written with Republican David Vitter of Louisiana. “Too big” means banks with more than $500 billion in assets: Bank of America, Citigroup, JPMorgan Chase, Morgan Stanley, Wells Fargo, and Goldman Sachs. Mr. Brown wants them to be able to take care of themselves when they fail.
Under the bill, the megas would be required to retain sufficient assets to withstand a crisis. The bill sets an 8 percent minimum capital requirement for banks with assets of $50 billion or more, and a 15 percent minimum capital requirement for the $500 billion banks.
Here is the problem: When a bank is too big to fail, it has gotten that way with speculation in a wide array of economic activities. Because the failures of those large banks could crash the economy, the government is in the position of guaranteeing, indeed subsidizing, risks that small banks would never take. In other words, irresponsibility is rewarded.
Responsibility is shifted from management and shareholders to taxpayers. And a two-tiered system of banking, and banking guarantees, is created, which is both irrational and unfair.
Says Mr. Brown: “The legislation presents Wall Street megabanks with a clear choice: Either have enough of your own capital to cover your own losses, or downsize until you are no longer a risk to taxpayers.”
In short, there would be no bank too big to fail. Large banks, like small ones, would be financially responsible for their own actions.
The two senators have been working on this since the 2009 financial bailout. They say the Dodd-Frank financial reform legislation did not go far enough, because all the incentives remained for the worst behavior of megabanks. This bill will try to alter the incentives, at least slightly, toward banks that are accountable for their own decisions.
Mr. Brown says his bill has wide support. That is a good thing. The nation can no longer afford to guarantee megabanks. More important, their managers and stockholders need to learn the basic lesson we all try to teach our children: Actions have consequences and you must own your own decisions.