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Let's keep banks from growing too big to regulate

By Sherrod Brown
Friday, April 30, 2010; A19

Wall Street executives and newspaper editorial boards argue that it's not size but the systemic risk and the interconnectedness of "too big to fail" banks that matter ["Bailing out of bailouts," editorial, April 25].

They are wrong. Too big to fail is simply too big. It's not a choice between competing options. The foundation of the argument that we can always understand and recognize risk is about as sturdy as the mezzanine tranche of a subprime securitization.

Three years ago -- before some of our nation's biggest financial institutions put our economy on the brink of collapse -- this argument would have carried more weight. But after millions of jobs and homes have been lost and trillions of dollars in savings have been destroyed, we must recognize that regulatory hubris is a dangerous thing.

Two years ago -- after failing to detect or address growing risk in the financial sector -- the Bush administration stepped in to save those institutions deemed "too big to fail." By intervening to save some banks but not others, the federal government essentially set a size threshold. While all of the institutions that foundered in 2008 were tightly woven into the fabric of our economy, some were big enough to shatter our economy. Those institutions received bailouts and the smaller institutions were allowed to fold, taking countless small businesses and jobs with them.

The Wall Street reform bill that is before the Senate, now that Republicans have ended their filibuster, will make important changes to our laws to provide for the orderly liquidation of these trillion-dollar banks if necessary. Those changes are important but not sufficient.

Fifteen years ago, the assets of the six largest U.S. banks made up 17 percent of our gross domestic product. Today, the top six banks make up 63 percent of GDP. No wonder our economy's fate is tied to their stability. As former FDIC chairman William M. Isaac has said, these banks are "too big to manage, and too big to regulate." With mega-banks, a single insolvency can send our economy into a tailspin. We shouldn't wait for trouble; we should avoid it.

We have experience in how to wind down banks -- the Federal Deposit Insurance Corp., unfortunately, is doing a lot of that these days. But a $10 billion bank is much different from a $1 trillion bank with international operations and connections. And while Wall Street maintains that size may not matter, I'd love to short the survival of that sentiment should any of these mega-banks run into trouble down the road.

Think about the position we would put some future administration and Congress in if the trends toward concentration remain unchecked. Will Washington really have the fortitude in 10 or 20 years to shut down a bank that has grown to more than 20 percent of our nation's GDP?

These concerns are why I have introduced the SAFE Banking Act with Sen. Ted Kaufman (D-Del.). This legislation -- which we are offering as an amendment to the bill being debated on the Senate floor -- would ensure that no bank becomes so large that it could overwhelm our ability to regulate, and, if necessary, liquidate it.

The legislation imposes sensible size and leverage requirements: No bank could grow larger than $1 trillion in liabilities, and no investment bank could be larger than $420 billion -- with these limits rising as the economy grows. Moreover, banks could not borrow more than $16 for every $1 they hold in capital.

We owe it to taxpayers to develop a toolbox that includes multiple measures to prevent bailouts. That means a tough authority measure to ensure the orderly liquidation of big banks if they become insolvent. And it means sensible size and leverage limits so we'll never have to bail out a bank again.

It is all about size and risk.

The writer is a Democratic senator from Ohio.

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