Go Brown-Vitter! April 7, 2013 at 7:15 am

From Bloomberg:

The largest U.S. banks… would have to hold capital in excess of Basel III standards under a proposal being drafted by Senate Democrats and Republicans to curb the size of too-big-to-fail banks.

The current draft of the legislation would require U.S. regulators to replace Basel III requirements with a higher capital standard: 10 percent for all banks and an additional surcharge of 5 percent for institutions with more than $400 billion in assets. Senators Sherrod Brown, a Democrat from Ohio, and David Vitter, a Republican from Louisiana, have said they intend to introduce the bill this month.

I doubt that they can get this through Congress in this form, but you have to applaud the attempt.

Update. The full text of the bill is here. It’s even more interesting than the Bloomberg story indicates. The highlights are:

  • 10% simple leverage ratio limit;
  • ‘Continuously increasing’ capital requirements above $400B of total assets (although it doesn’t say how);
  • Total assets include gross derivatives unless daily VM is exchanged;
  • A ban on Basel III implementation in the US;
  • Prohibitions on affiliate transactions and an anti-avoidance clause.

5 Responses to “Go Brown-Vitter!”

  1. I agree; very interesting.

    However, I’m not sure I get it all. Why would they ban Basel III implementation? Surely the capital requirements would never be below Basel III, by my quick math?

    Also, Matt Levine has a good post on it: http://dealbreaker.com/2013/04/some-senators-think-big-u-s-banks-could-use-an-extra-trillion-dollars-or-so-of-capital/

  2. Simon – I think they might be worried about the damage the B III liquidity ratios will do, rather than about B III’s capital provisions. More generally it is an in-sourcing of capital regulation from Basel back to the US.

  3. Good points!

  4. Me like. More transparent than B3, and would work where B3 wouldn’t. Especially like the “stick it to B3” part.
    That said, I doubt they will get anything like this through, after the lobby had a go at it.

  5. Implications:

    1) Serious economic drag, decrease in multiplier (since bank equity limits fractional reserve banking more than reserves)

    2) More large banks, as a bank with a 2T balance sheet would be better of splitting into 4 or 5 banks. Other banks would have every incentive to get to the $400bn balance sheet limit, since a dollar of assets has a higher return on equity up to that point.

    3) Moving low risk, high balance sheet utilization business outside the US. I’m thinking of things like prime brokerage.

    4) Generic increase in credit spreads especially for the best borrowers – banks simply won’t earn a high enough RoE to lend to them. If you are targeting a 15% ROE and you’re only levered 7:1 (because you’re over $400bn in asssets), you need a 200bp+ RoA – and you just can’t lend much to high quality investment grade companies.

    Sounds like a long shot to me.