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.