Senate Takes a Swipe at Too Big to Fail Banks

U.S. Senate Republicans and Democrats are drafting a proposal that is designed to curb the size of some of the largest banks in the United States. This proposal would require some of the banks, including JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC), to hold more in capital than required by the Basel III standards.

The draft of legislation as it is would require U.S. regulators to move from the Basel III standards to requirements where all banks would have to hold 10 percent of their capital plus an extra 5 percent for any bank who holds more than any $400 billion in assets.

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This legislature is due at least in part to the demand for increased regulation of banks. Currently, the Basel III regulations state that a bank has to hold at least 7 percent of Tier one capital against their risk-weighted assets. Some of the largest banks face as much as a 2.5 percent surcharge.

The extra provisions of the bill would only be imposed on six banks including JP Morgan,  Goldman Sachs Group Inc. (NYSE:GS), Citigroup Inc. (NYSE:C), Bank of America, Morgan Stanley (NYSE:MS), and Wells Fargo & Co. (NYSE:WFC) as all of these banks have more than $400 billion in assets. The co-founder of the Federal Financial Analytics Inc., Karen Shaw Petrou, said that this legislation would return the banking system to a time before the Federal Deposit Insurance Corp. (FDIC) started guaranteeing bank deposits.

Some critics of the legislation claim that mandating excessively high capital will restrict the ability of banks to lend money and hurt economic growth. It is likely that this bill would change even more before it is introduced. Additionally, it would have to pass both chambers of Congress and be signed by President Obama.

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If this legislation passes, it would change the way banks work as they would have to rely more on tangible common equity and less on risk-weighted equity. Furthermore, this kind of regulation would require the Federal Reserve to write additional regulation. There seems to be an increased interest in regulation after the financial crisis, although the bill still needs more support.

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